US equity markets made the running last week, but September isn’t living up to its billing. Traditionally, the ninth month of the year is a graveyard for equity traders, particularly those on the long side.
However, the S&P 500 has added just over 4% over the last five trading days, finishing the week less than 1% below its all-time high. This sudden burst of optimism comes ahead of this week's US Federal Open Market Committee (FOMC) meeting, at which the Federal Reserve's rate-setting committee members are expected to cut rates by at least 25 basis points on Wednesday - though some doves are cooing loudly about a 50 basis-point reduction.
There are two ways to look at a potential 50-bps cut. The first is that the Fed has seen the error of its ways, now realises it was behind the curve and should already have cut rates to bolster a slowing economy, and could double up on Wednesday to get back on track. There is also the more extreme idea that the spectre of a recession is looming large in the US, and that Fed policymakers realise they have no choice but to cut now and cut hard to stave off negative growth. In either of these scenarios, the Fed could potentially aid equity traders and investors.
There is also a third possibility; that the US economy is doing fine, rate cuts aren’t required to save it, and in an election year, the central bank could be circumspect in its action.
At a sector level information technology was the star performer, rallying by 7.33% last week, and for once Nvidia wasn’t the leader. That honour fell to Broadcom, which gained almost 22.5% last week, making it the top gainer in the S&P 500. Super Micro Computer also stood out among weekly gainers, rallying 18.29% as it tried to shake off uncomfortable questions from short sellers about its accounting practices. Despite that bounce, the stock is down by 47.5% over the last three months.
Not everything in the IT sector was up on the week, however. Adobe Systems lost 4.71% and Hewlett-Packard fell by 2.17% as it issued a substantial tranche of convertible bonds. The biggest loser in the S&P 500 last week was Humana, which lost 10.14%. The health insurer is struggling to make money from “Medicare Advantage”, an outsourced healthcare plan run in conjunction with the US government, and Humana is now scaling back its coverage.
Alongside the FOMC meeting, the macroeconomic calendar includes UK inflation data and retail sales on Wednesday and Friday, US retail sales on Tuesday, the Bank of England’s interest rate decision on Thursday, and ZEW economic sentiment readings from Germany and the wider EU on Tuesday. Read our week ahead preview for more details.
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