Stocks in the US plummeted! Is the curse of September here? Why does the market drop in September? How should investors deal with it?

Since the beginning of September, the US stock market has given investors a warning. As of last Friday's close, the US stock market plummeted after the release of August non-farm payroll data. The NASDAQ index fell by 2.55% and the S&P 500 fell by 1.73%. Among the constituents, Broadcom fell by more than 10%. Tesla fell by over 8%, while ASML Holding and Nvidia fell by over 4%.

From the current situation, the "curse of September" that worries US stock traders seems to be taking effect. The US stock market started September with a sharp decline, and based on historical performance, the US stock market tends to perform poorly in September.

Every September, for long-term investors who observe the stock market, they may have heard of the seasonal pattern of the stock market. The "curse of September" is not unfounded but rather the result of long-term market performance statistics. According to data from multiple investment research institutions, the performance of the US stock market in September is generally poor. This shift may also trigger a reassessment of market risks, leading to changes in investor psychology and capital flows. Interestingly, stock markets in several countries around the world also show relative weakness in September.

Since 1928,the average decline of the S&P 500 index in September is -1.2%, with a maximum, and only 44% of the time is positive return.

If the time is shortened, the average decline in the S&P 500 index in September over the past 10 years is also -2.3% , also the only month with negative returns in the past 100 yearsthe Nasdaq index has been trading since 1971, and September also has an average decline of -0.6% , interestingly, September is also the worst-performing month for cryptocurrencies from 2013 to 2021, hence it is calledThe September Effect.

Although in reviewing history, the September Effect may be real,but it does not mean that a decline is inevitable.It may be the result of a few historical market crashes. The worst month in history was 1931 when the S&P 500 index fellby -29.7%,in addition to the 2008 financial crisis. Therefore, it may not be worth basing future trading strategies on, because if extreme events are excluded, the frequency of large declines in September is not as frequent as before.

Although US stocks typically experience a decline in September each year, the specific reasons vary from year to year. What caused the sharp drop in US stocks this year?

As a key indicator to determine whether the Federal Reserve will cut interest rates by 25 or 50 basis points in two weeks, the US Department of Labor released the non-farm payroll report for August.

The latest data shows that the number of non-farm payrolls rebounded to 0.142 million people from the previous month, with a median analyst expectation of 0.165 million people. The unemployment rate decreased to 4.2%, in line with expectations. It should be noted that these two data points are from two different surveys, with employment numbers coming from a sampling of businesses and government agencies, while the unemployment rate comes from a household survey.

Investors did not see any positive news, which instead exacerbated concerns about the slowdown in the labor market. Safe-haven sentiment escalated, leading to the sell-off of riskier assets. US chip stocks and technology sector led the decline.

As a 'bellwether' for US technology stocks, Nvidia has recently been under continued downward pressure.

Previously, although Nvidia's second-quarter revenue and profits exceeded Wall Street's expectations, the stock price plummeted by 8% at one point due to the lack of surprises and falling short of the most optimistic expectations. Bloomberg, citing insiders, reported that the US Department of Justice issued subpoenas to Nvidia and some third-party companies, seeking evidence of Nvidia's violation of antitrust laws. After this news came out, Nvidia's stock price came under pressure and fell.

The enthusiasm for the AI industry has also declined recently. Taking ChatGPT as an example, according to the latest data from Goldman Sachs, the monthly total visits to the ChatGPT website have sharply declined from spring to midsummer. The report states:

"Monthly users are seeing the initial 'excitement' around ChatGPT fade. This, of course, doesn't mean that the growth rate in the relevant industry won't be strong, but it does suggest that the next wave of beneficiaries could come from new products and services created based on these foundational models."

A sharp drop in monthly visits does not mean the end of OpenAI. Customers may be tired of GPT-4, and some users may find it unnecessary to integrate AI chatbots into their daily lives.

There are many reasons for the sharp decline in US stocks. Although the disappointing ISM Manufacturing Index is not the main reason, the market seems to consider this data as the culprit for investors selling stocks. Overall, although the August ISM Manufacturing Index has risen slightly, the increase is not as expected, and it has been below 50 for 5 consecutive months, indicating a further contraction in manufacturing demand, leading to a decline in production. The production index has hit its lowest level since the pandemic. In addition, the final S&P Global Manufacturing PMI was revised down from 48.0 to 47.9, which also fell short of market expectations.

In fact, although the ISM Index rebounded from July, it slightly fell short of expectations. The market seemed to magnify the decline in the production index and new orders, as well as the rise in inventories, causing the new orders-to-inventory ratio to fall to recession levels, which is seen as a warning sign of an economic decline. At the same time, the price index has resumed its upward trend, signaling stagflation and triggering market panic once again.

Bank of America economists predict that the Federal Reserve will only have two 25 basis point rate cuts this year. If the US economy rebounds strongly from the weak July employment report, it could change market sentiment and prove that investors are too confident in the Fed's path of rate cuts, which could put downward pressure on US stocks.

As can be seen, the key economic data released recently may affect the extent of the Fed's rate cuts, thereby impacting the sentiment in the US stock market. In the short term, before the results of the Fed's monetary policy decision in September, the performance of US stocks will continue to revolve around US economic data and the path of Fed's monetary policy.

In terms of the US economy, the manufacturing sector is weak, but the service sector shows resilience, and a soft landing is still the most probable outcome. The US August ISM index was 47.2, slightly lower than expected; however, the August ISM services index was 51.5, slightly higher than the expected 51.4. The US economic growth is mainly contributed by consumption and the service sector. Although the manufacturing sector is weak, the service sector continues to maintain a moderate expansion. Therefore, we believe that although the US economy is slowing down, the probability of a severe recession in the short term is small, and we still consider a soft landing as the baseline condition.

In terms of the fundamentals of US stocks, the Q2 earnings performance of US listed companies is still good. On a comparable basis, the S&P 500 second quarter EPS increased by 11% YoY, accelerating from the 6% growth in the first quarter; the NASDAQ index EPS growth rate was 13%, which declined slightly, but technology stocks still provide important support for capital expenditure and share buybacks in the current US stock market, and the market remains positive about the long-term growth prospects of AI.

The US stock market experienced a rapid rebound in August and is now in a relatively undecided position. The closer it is to rate cuts, the more sensitive the market will be. September is traditionally a turbulent time for the US stock market, as the presidential debates between Harris and Trump are about to begin, and the highly anticipated Apple product launch will also take place this week. These events may cause greater market volatility in the short term, but currently we do not see any fundamental factors that would cause a sharp decline in the stock market. Historically, every deep correction has been a rare buying opportunity, and dollar-cost averaging and buying at low levels are good strategies to deal with the current volatility.

Overall, although the sharp market decline in the short term poses a significant confidence test for investors, in historical perspective, every stock market adjustment may present new opportunities for repositioning. Investors should remain vigilant, manage risks, and allocate assets reasonably to cope with unpredictable market fluctuations.