There are 5 things to know before Monday’s stock market open. This stock market analysis covers the latest stock market news, the economic news coming out this week, the September FOMC meeting, Jerome Powell’s speech, the Auto Union Workers strike, the government shutdown, and the rest of the stock market news today. Before you start stock trading this week, watch this stock market course where the you’ll find the stock market explained in a way stock market for beginners can understand. The second half of September could see a stock market crash, so watch out, because this could be the start of the stock market crash 2023.
Hey guys, it’s Stock Curry, and here’s everything that you need to know before the markets open on Monday. First of all, September is historically the worst month of the year for the stock market. But month to date, the market’s only down about 1%. But keep in mind that September normally trades flat for the first half of the month and then it starts to go off of a cliff in the second half of the month. As you can see here on this chart. So get ready for some major downward pressure on the stock market for the rest of September.
Now the reason the stock market is normally down in September is because something happens every single year on September 30th that causes the stock market to fall leading up to this event. And that particular event is the government budget. Every single year the government budget runs from October 1st through September 30th. And as September 30th approaches, the people in Congress and the Senate, they have to work out a budget and they have to agree upon how much the government is going to spend for the following year. And the problem is Congress, they never really get along. They never really agree upon anything. So very often they get right up to that September 30th deadline, they still cannot get a budget in place, and what ends up happening is come October 1st the government will shut down and it will be only essential employees that are allowed to go into work and everybody else is forced to stay home without pay. And this is a big problem.
This obviously causes a major downturn in the economy since the US government is one of this country’s largest contractors or largest employers. And this is a major, major problem. So that’s why the stock market normally goes down in the second half of September, is because of this fear that a government shutdown might occur and a fear that the economy overall is going to get hurt if the government shuts down because politicians just can’t get their act together. And of course, this year is no different. Top Democrats say House Republicans are in a civil war as the government shutdown looms.
Now it’s not just the government shutdown that could cause the market to go down over the next two weeks. We’ve got other issues as well. And one of those is the United Auto Workers that are currently on strike. And this has shut down major plants such as Ford and GM. Stellantis is the third plant that’s been shut down due these strikes. And Stellantis has offered raises and inflation protection measures to UAW as the strikes continue. But so far there hasn’t been a lot of help from Ford or GM. Now this is a major problem in America because the auto industry is a very large part of the US economy. And if these auto workers continue to be on strike, it’s going to really hurt the US economy. So much so that the White House is now sending a team to Detroit early this week to try to resolve the UAW strike.
And if that wasn’t enough to cause the stock market to go down over the next two weeks, we’ve got another problem happening on October 1st. Student loan payments are going to restart on October 1st. And this is threatening to pull $100 billion out of consumers pockets. Now, consumers are already struggling. And if they have to start paying back student loan bills on top of everything else that’s going on with inflation, that is going to cause them to spend a lot less money on companies. And as companies revenue goes down, this is going to force them to do layoffs in order to keep their profits up. And as they do layoffs, this is going to cause consumer spending to go down even more, which is going to hurt the economy even more. And it’s a spiral effect that hurts everybody. And this is one of the reasons why we’re starting to see the unemployment rate rise here in the United States, is as the economy continues to get worse and consumers have less money to spend, companies are forced to do more layoffs.
And while in the short term, this is good for stocks because companies can increase profits by doing enough layoffs to the point where they were able to lower their expenses more than the revenue goes down, which has the net effect of increasing profits. The problem is, in the long run, companies are going to get to a point where they simply cannot do any more layoffs without further hurting revenues. And at that point, revenues just keep going down and then profits start going down as well. Now, we’re probably not going to hit that point until 2024, but it’s starting and we’re seeing the signs of it.
And we’re going to get more indications of how bad this is going to get this week with this week’s economic data. On Monday, we get the homebuilder confidence index, which is expected to fall below 50. Any number below 50 means homebuilders are expecting a recession in the housing sector. Also on Tuesday, we get housing starts and building permits for August. Housing starts are expected to have dropped again, showing a decline in the housing sector, although building permits is expected to rise mildly. But then on Wednesday is the thing that everybody’s really concerned about, and that is the Fed’s FOMC meeting, their interest rate decision, and of course Jerome Powell’s press conference. Now, the interest rate decision occurs about 2 p.m. Eastern time, about two hours before the market closes on Wednesday. And then Jerome Powell speaks 30 minutes after that, about an hour and a half before the market closes. He will generally speak for about half an hour and then the market will have about an hour to kind of decide what it wants to do. But generally, we don’t get the real price movement from the Fed until the next day on Thursday, because that one hour just really isn’t enough time to really comprehend everything that happens. So usually you get to see the real price move on Thursday.
So expect a lot of volatility, especially on Wednesday and Thursday because of the FOMC meeting that’s occurring this week. Some of the things the Fed is struggling with is the fact that inflation has started to go back up. At the same time, the economy is slowing down. And even though the official economic data still shows that the economy is quite strong, the leading economic data shows that we have most likely been in a recession for the past 7 to 11 months, and the US leading economic indicators for August are being released Thursday at 10 a.m. and they are expected to show a decline of 0.5%, showing that if we are in a recession, it’s actually getting worse. Those leading economic indicators, by the way, usually show up in the official government data about 3 to 6 months in the future. It takes a really long time for the official government data to reflect what’s actually happening in the economy due to the way that those calculations are made. That’s why it’s so important to look at the leading economic data that comes out on Thursday, because this gives a really good indication of where the economy actually is, not what it did 3 or 6 months ago.
Then finally on Friday, the Federal Reserve’s blackout period is over, and we’ll hear from Fed Governor Lisa Cook, as well as two Fed presidents. Now, personally, I feel like the market might rally after the FOMC meeting because I do expect them to pause. I think there’s about a 97% chance that they’re going to pause right now based upon CME futures. But they are expected to raise rates again at their next meeting on November 1st. So it’s really hard to say what the market is going to do. On one hand, I think it might rally because when we get a pause, investors just generally tend to be extremely bullish and optimistic on anything the Fed does. If the Fed comes out really dovish and pauses, the stock market tends to rally. And if the Fed comes out really hawkish and wants to raise rates, the stock market tends to call them liars and not believe them, and the stock market tends to rally. So it doesn’t really seem to matter what the Fed does. The stock market just seems to go up no matter what. But should the stock market actually believe the Federal Reserve this time and somehow wake up, it’s possible the market could go down. We just haven’t seen that happen at all this entire year. So that’s why I think the market would rally just because it’s been rallying all year long. Why would it stop now?
But that said, because the market has been rallying all year, valuations are getting a bit lofty and this could make some people a bit nervous. You see, the S&P 500 overall valuation is trading at about 18.8, a slight elevation to its historical average. But it’s that technology sector of the S&P 500 that makes up 25% of the S&P 500. That really has people worried because if you look at the forward PE ratios on the S&P 500 technology sector outlined here with this blue line, you will see that we are back at the highest level we have been right before the bear market of 2022. So the last time we got up to this level, we entered a huge bear market. And if we go any higher than this, we’ll be at the highest level we’ve been at since the dot com bubble when the NASDAQ fell 80%. So these valuations are causing some people to get nervous because what very often happens when the stock market becomes this overvalued, or more specifically when technology stocks become this overvalued, is that large institutions start to sell. And when large institutions start to sell, this causes the overall market to go down. And that’s what’s got a lot of people worried right now is they’re afraid of large institutions taking profits.
Now that we have these extremely lofty valuations, the fact is the tech trade is showing cracks and higher rates for longer spell more trouble ahead. Investors years long enthusiasm, pretty much 15 year long enthusiasm, for tech shares was fueled not just by innovation at software and hardware companies, but also by ultra low interest rates that made the future profits promised by those companies especially valuable. You see, during a 0% interest rate environment like we had for 13 years going into 2022, or at least the very end of 2021, technology companies were able to grow at massive paces. They were able to see extreme growth because when you have a 0% interest rate environment, this is designed to spur growth in the economy. And technology stocks are uniquely positioned to be able to grow faster than almost any other sector.
But we’re no longer in a 0% interest rate environment. We’re now in a 5% interest rate environment, and it doesn’t look like the Fed has any desire to lower interest rates anytime soon. What that means is that technology stocks are not going to be able to grow at the rates that we’ve seen them grow in the past. These 20%, 30% annual growth rates are most likely going to go away, and they’re going to get replaced by much more reasonable, maybe 5 or 10% annual growth rates. And we’re already seeing that in stocks like Tesla and Google and others. And the problem is that this is probably going to be here to stay. And as more investors realize this, and more investors get out of this mindset that you just buy technology and that’s how you make money, and they begin to understand we’re in a new paradigm, we’re in a new reality, then investors are most likely to sell those tech stocks and put their money into other stocks.
You see, tech calculations changed last year when the Fed began aggressively lifting interest rates. Now this year, excitement about advances in artificial intelligence and bets that the Fed would start cutting rates sooner rather than later, sent stocks higher once again. But a stubborn streak in inflation data, and a surprisingly resilient economy, have pushed out the date at which the market expects rate cuts, causing investors to look with renewed skepticism at the valuations commanded by the market leaders. Cracks have already started emerging in the tech sector. Shares of Apple have declined 6.8% this month, while Nvidia has retreated 11%. And that’s during a period where the overall stock market traded flat. What’s going to happen in the second half of September if we do in fact get the market sell off that we normally get? A prolonged period of high interest rates could spell trouble for stocks, especially those with lofty valuations.
Investors who for years found few alternatives to the equity market can now earn 5% with little risk in a money market fund. That newfound competition could weigh on what investors will pay in the stock market for a potential slice of future company earnings. And this is what I’m talking about when I say investors will start to look at the valuations of tech stocks, they’ll begin to get concerned that tech stocks really have nowhere to go but down. They’ll start to sell out of that fear and move that money into something like a money market fund that has a guaranteed 5% rate of return. And as more and more investors do that, that could cause tech stocks to go down. The information technology sector traded late last week at 25.5 times its expected earnings over the next 12 months. That’s above the ten year average of 18.5. That means tech stocks would have to fall by 27% just to get back down to fair valuation. The fact is the markets are just plain overextended. There’s too much euphoria in the big seven tech companies. The S&P 500, meanwhile, commanded an 18.9 times its forward earnings, which was above the ten year average of 17.7. That means the S&P 500 would have to fall by 6.6% just to get back down to an average valuation that it normally trades at.
The fact is that just because technology stocks rallied over the past 15 years does not mean that they’re going to continue to rally in the future. As Davey said, just because something worked the last ten years does not mean it’s going to work in the years to come. So investors and traders are going to have to accept this new paradigm that the stock market is completely overvalued right now and that it has to come down a lot to get back down to some fair valuation. We’re going to need to see about a 6 or 7% decline in the S&P 500 just to get back down to a more normal valuation. And we’re going to have to see a decline of about 27% in technology stocks before they get back down to a more average valuation. Of course, not all stocks are going to fall or rise equally. Some stocks are most likely going to fall more than others. But this is just something to watch out for that the market might be shifting from what’s known as mark up, where stocks rally, to distribution, where stocks top out and they start to transition into a period where the stock market goes down. We do need a small pullback or correction here in the S&P 500 before we can have a healthy rise in the future.