Hello everyone,
Wrong again, lol. Maybe I should stop writing. Last month I told you that historically, August ranks as one of the worst months for stocks, with the Dow Jones Industrial Average posting an average loss of about 1.1% during August over the past several decades. Moreover, The Stock Trader's Almanac’s data highlights a recurring seasonal pattern often referred to as the "August Doldrums," where trading volumes decline and market volatility tends to increase, leading to generally subdued or negative returns.
Apparently, August has decided to thumb its nose at history. Instead of wallowing in doldrums, markets seem to have shrugged off seasonality and roared ahead—defying every textbook and almanac I clung to when I wrote last month’s letter. The rally caught many off guard, myself included, and it begs the question: what forces managed to flip the script so dramatically?
It is tempting to point to shifting tides in policy, global events, and economic resilience. But the truth is, the market moves on a complex cocktail of factors, some visible and some veiled, and this month was a masterclass in unpredictability. So, if you’re feeling dizzy from the whiplash—join the club.
Yet, as the numbers rolled in, what unfolded was a broad-based surge, not only in US indices but across major world markets. Investors, who entered August bracing for the worst, found themselves staring at green screens and upward trends that, frankly, made last month’s cautionary tales obsolete.
The S&P 500 increased by 2.56% (https://ycharts.com/indices/%5ESPX/level) and the TSX rose by 4.31% (https://ycharts.com/indices/%5ETSX/level) in August. In the US, softer-than-expected inflation data for July contributed to greater market confidence that the Federal Reserve could lower interest rates as early as September. The US Consumer Price Index (CPI) for July increased by 0.2%, and the core CPI rose by 0.3%, both matching expectations and indicating stable inflation rates.
By late-August, the estimated probability of a Federal Reserve rate cut in September exceeded 86%. The possibility of a 50-basis point cut was mentioned by Treasury Secretary Scott Bessent, though a 25-basis point reduction was considered more likely. Declining US Treasury yields, and a weaker US dollar supported equities, particularly in sectors sensitive to interest rates such as technology and consumer discretionary. Market gains were observed across most sectors due to positive economic indicators and expectations of more accommodative monetary policy.
The TSX experienced gains this month due to several factors. Positive third-quarter earnings from large Canadian banks, including Bank of Montreal (BMO) and Scotiabank (BNS), contributed to the financials sector's performance. The industrials sector also recorded gains, supported by earnings reports and improved outlooks.
Energy stocks declined slightly toward the end of the month; however, earlier advances resulted from increases in commodity prices, such as a rebound in gold (associated with a weaker US dollar and lower Treasury yields) and a temporary rise in oil prices after larger-than-expected US inventory draws.
Canada's economic data presented mixed results, but included some improvement, such as higher wholesale and manufacturing sales and continued stability in the housing market. Investor sentiment reflected ongoing expectations that the Bank of Canada could reduce interest rates later in the year, as inflation figures moved lower and economic slack increased.
In summary, August's gains for both indices came as inflation data reinforced expectations for rate cuts (in the US and potentially later in Canada), fueling investor confidence and risk appetite. Sectors like financials, industrials, and energy (for the TSX), as well as tech and discretionary (for the S&P 500), led the advance.
Looking ahead, I'm cautiously evaluating whether recent positive momentum can persist through the autumn months. And it's not just me, analysts are closely monitoring upcoming economic indicators, central bank communications, and fiscal policy developments for further signals regarding the trajectory of interest rates and market performance.
Financial markets typically underperform in the month of September compared to other months of the year. Historically, the S&P 500 has declined an average of about 1.2% in September since 1928, making it the worst month for major indexes in terms of average returns (https://simplyethical.com/blog/are-september-and-october-bad-months-for-financial-markets-and-stocks/).
Since 1950, the average return for the S&P 500 during September is roughly -0.5%, distinguishing it as the only month that has consistently posted negative returns on average(https://www.cmegroup.com/openmarkets/equity-index/2023/three-reasons-for-the-September-Effect-in-stocks.html).
More recent data since 2000 show the S&P 500 losing an average of 1.7% during September, which again highlights the generally weak performance during this month (https://www.finsyn.com/why-is-september-the-worst-month-for-the-stock-market/). This phenomenon is often referred to as the "September Effect," and stocks have declined in September around 55% of the time since 1928 (https://www.investors.com/research/dow-jones-stock-market-nasdaq-sp500-september-worst-month-investors-what-to-do/). Some explanations for this seasonal trend include lower trading volumes during the summer months leading into September, tax-related selling, and portfolio repositioning by investors after summer vacations.
While the historical data point to September as a month of underperformance, it is not a guarantee and should not necessarily dictate investment decisions. Some years, the market has posted gains in September—for example, in September 2024, the S&P 500 rose 2%, Nasdaq gained 2.7%, and Dow Jones increased 1.9% (https://www.rbcwealthmanagement.com/en-us/insights/nothing-new-about-september-slides-for-stock-markets). However, the way things are going, I wouldn't be surprised if September outperforms, lol.
However, there is something at play here on how the next few months play out. As September unfolds, attention will focus on the resilience of consumer spending, corporate earnings guidance for the fourth quarter, and more importantly, how the financial markets respond to the US Government interference with the Federal Reserve, their Central Bank.
The Federal Reserve, as the Central Bank of the United States, occupies a unique position in the global financial system. Its mandate centers on fostering maximum employment, stable prices, and moderate long-term interest rates. Crucially, the Fed is designed to operate independently of direct political control, a structural choice meant to shield monetary policy from the vicissitudes of short-term political interests. However, the prospect of US government interference—whether overt pressure, legislative constraints, or informal influence—raises profound concerns within financial markets.
Central bank independence is regarded by economists, investors, and policymakers as a bedrock of macroeconomic stability. An independent central bank is better equipped to set interest rates and undertake policy moves grounded in economic realities, not political expediency. The Federal Reserve’s independence is codified in its structure, which features staggered terms for its governors and explicit limitations on removal by the executive branch.
Markets prize this independence because it increases the credibility of monetary policy. When market participants believe the Fed will set policy based on economic fundamentals rather than political pressure, inflation expectations remain anchored, and risk premia for US assets stay relatively low. Conversely, any signs of erosion in independence can trigger volatility, repricing of assets, and uncertainty about the path of interest rates and inflation.
While the Fed’s independence has largely been respected, history offers several examples of US government attempts to influence policy. One in particular, in the Nixon Era (1969-1974), President Richard Nixon reportedly pressured then-Fed Chairman Arthur Burns to maintain loose monetary policy ahead of the 1972 election. The resulting inflation contributed to a loss of market confidence and the eventual breakdown of the Bretton Woods system. And well, today, we have the Trump Administration publicly criticizing the Fed and its chair, Jerome Powell, for maintaining restrictive policy. In the end, each episode has been met with heightened scrutiny by financial markets, as investors try to assess whether the Fed will remain an impartial steward of the economy or bend the knee toward political aims.
Financial markets often react to interference with higher volatility and increased risk premiums, as policy decisions influenced by politics can create uncertainty in equities, bonds, currencies, and commodities. Government intervention may lead to repricing of US Treasuries, as it undermines faith in the Fed’s inflation-fighting role. This can raise yields and decrease demand. Furthermore, concerns over Fed independence may weaken the US dollar as investors turn to currencies with more credible central banks. Overall, such uncertainty can spur equity market swings and erode investor confidence.
The Federal Reserve's independence underpins market stability by anchoring inflation expectations, reducing policy uncertainty, and ensuring global confidence. Credible monetary policy keeps inflation predictable, while independence prevents political cycles from creating volatility. The Fed's autonomy reassures international investors and helps avoid fiscal dominance, where pressure to finance government deficits could lead to inflation and undermine fiscal responsibility.
In recent years, some analysts have suggested that the Fed has become more sensitive to market pressures, a phenomenon dubbed the "Fed Put." While not direct government interference, it reflects a perception that the Fed may act to support asset prices or respond to political criticism. Markets debate whether this represents a loss of independence or a pragmatic response to financial stability concerns.
Nevertheless, most investors distinguish between responsiveness to economic data and explicit government pressure. The latter is viewed as far more damaging, potentially undermining the institutional credibility that underpins asset valuations and risk assessments.
Financial markets value central bank independence, as countries lacking it—like Turkey and Argentina—often face higher inflation, weaker currencies, and instability due to political interference. These examples highlight why markets prioritize independent monetary policy.
Ultimately, the enduring value of central bank independence rests not only in macroeconomic theory but in the day-to-day realities of global financial trading, risk management, and capital allocation. Investors, analysts, and policymakers alike recognize that protecting the Fed’s autonomy is crucial for the health of financial markets—and for the broader economy they serve.
This month's edit is longer than usual to highlight a potential significant event for financial markets in 2025 concerning the Federal Reserve's autonomy.
Wishing everyone a good September.
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