Will Q4 be different for stock traders?

Stock indexes close out Q3 on a sour note after one of the most brutal Septembers in about two decades.

Q3 summary

The S&P 500 lost more than -9% during the month, which leaves the index down nearly -25% for the year.

The Dow has lost almost -21% while the Nasdaq is down over -32% so far this year. Bulls are hoping upcoming seasonal trends will help reverse the tide.

September has been the worst performing month of the year going back to 1971 and October has a reputation for "breaking" bear markets. That last claim isn't always the case, though. Notably, the S&P 500 fell almost -17% in October 2008 after falling more than -9% in September following the collapse of Lehman Brothers.

During midterm elections years like 2022, stocks do tend to rally in the fourth quarter, including October. Bears, however, don't believe seasonal trends can be counted on this year considering all the unusual external headwinds, including the highest inflation levels in +40 years, aggressive central bank tightening, and a war in Europe.

It is Fed’s turn

Concerns also remain that the US Fed and other central banks are going to "break" something after dysfunctions in several foreign bond and currency markets, including the UK and China, led to chaos last week. Many on Wall Street fear these might be just the first signs of bigger trouble ahead as increasingly tight financial conditions continue to drain liquidity from the worlds credit markets.

In fact, some inside Wall Street are worried that we could see a global credit crisis. Rumors were flying this weekend that Credit Suisse or perhaps some other major investment bank could be on the brink of collapse.

Late Friday, I heard that the cost of insuring the firm’s bonds against default climbed about +15% last week to levels not seen since 2009.

Here at home, there's some talk that the Fed's "Stress Test" for our banks could be a bit dated or backward looking as it mostly test for stress in a similar meltdown to 2008.

From what I am hearing it does not take into account sustained sky-high inflation and ongoing negative real disposable income. In other words, this is much different animal than we have seen in many decades because of the crazy high inflation, so who really knows on the "stress testing".

Some bulls are still trying to say this is another reason the Fed should issue smaller rate hikes or even pause its tightening campaign at the November or December meetings.

Bears, however, say the inflationary data still doesn't support a more dovish Fed, pointing to the PCE Prices Index for August released on Friday that showed a slight decline in the year-over-year rate to 6.2% from 6.4% but a gain in the core rate (strips out food and energy) to 4.9% year-over-year versus 4.7% in July. Combined with earlier data showing the lowest New Jobless Claims since early May, many bears believe the Fed will need to cause an outright recession in order to break the inflation cycle.

Data to watch

Investors will get more job market data this Friday with the key September Employment Report. Economists are forecasting a slowdown in the pace of job gains to +250,000 from +315,000 in August with the unemployment rate holding steady at 3.7%.

More important will be the pace of hourly wage gains with consensus looking for the year-over-year rate to fall back a bit to a gain of +5.1% from +5.2% previously.

Data today includes the ISM Manufacturing Index and Construction Spending.

Turning to oil markets, traders are anxious ahead of OPEC's meeting on Wednesday with the group set to consider additional output cuts.

Russia is allegedly pushing for a reduction of at least -1 million barrels per day. Several OPEC members are said to be pushing back against the such a large cut in favor of a less steep -500,000 barrels per day.

Oil insider think whatever OPEC is cooking up, it could be a "major" announcement due to the fact that the meeting was switched from online to in person at the last minute. There is even some speculation that members may discuss the possibility of removing Russia from the OPEC+ alliance as no Russian representative is scheduled to attend the meeting.

Speaking of Russia, President Putin on Friday went ahead with the unlawful annexation of four Ukraine regions, as expected. The move will not be recognized by Ukraine and most other countries, but since it is being recognized by Putin, many fear it raises the stakes for the US and its European allies.

Putin warned last week that Russia will use any means necessary, including nuclear weapons, if its territory is threatened. Others think Putin may use the ruse to declare "victory" and seek a peace deal. Interestingly, Ukraine recaptured a key city inside one of the newly annexed regions and all the Russian troops are said to have retreated.