US Stocks At Risk Of ‘Sell the News’ Drop On Fed Interest-Rate Cut, JPMorgan Traders Say

US stocks have been on a tear, setting more than 20 all-time highs this year, but the Federal Reserve’s next move threatens to curb investors’ zeal, JPMorgan Chase & Co.’s trading desk warns.

“This current bull market feels unstoppable with new support forming as former tent poles weaken,” according to Andrew Tyler, the bank’s head of global market intelligence. If the Fed follows through on a widely expected interest-rate cut at its Sept. 17 meeting, that “could turn into a ‘Sell the News’ event as investors pullback.”

JPMorgan’s trading desk maintained their lower conviction tactical bullish call while pointing to a number of risk factors including inflation, employment and the trade war in a note Monday. They also noted retail investors typically scale back their participation in September, while less corporates have been buying back their own shares.

The S&P 500 Index has climbed more than 30% from its April lows reached when President Donald Trump made his opening salvos in the global trade war. The stock market has so far proved resilient. But with the impact of tariffs just being felt and a recent weak jobs readout, investors are on edge ahead of an expected rate cut in typically the worst month of the year for the US equity market. 

Since late August, the S&P 500 Index has traded sideways, posting moves of less than 0.9% in each direction, steadily grinding higher to new records. It was a similar situation in July, when the benchmark went a whole month without a 1% daily move — its longest streak of tranquility in two years.

Tyler’s worry over the upcoming Federal Open Market Committee meeting acknowledges that while the consumer-price index reading on Thursday is unlikely to stop the Fed from cutting rates, commentary from public and private companies on inflation indicate there is more “tariff-induced cost passthrough” on the horizon, the speed and magnitude of which are unknown. Additionally, rate cuts could spur labor demand and in turn trigger wage inflation, which is typically “sticky.” 

Meanwhile, September usually has a confluence of factors dampening performance. Pensions and mutual funds rebalance portfolios at the end of the quarter, while retail buying activity tends to wane in September and Corporate America stops buybacks — a crucial backing for the market —  ahead of third-quarter earnings reports.

However, the month has defied the usual seasonal weakness when the Fed has made non-recessionary interest rate cuts. The S&P 500 Index has fallen 1% on average during Septembers going back to 1971, but gained 1.2% in the month when the central bank was reducing borrowing costs and the economy was not contracting, according to data analyzed by Bloomberg Intelligence strategist Nathaniel Welnhofer.

Last week, Morgan Stanley’s Michael Wilson acknowledged the seasonal weakness but recommended buying dips. JPMorgan’s trading desk backs buying options tied to the Cboe Volatility Index.

Given the heightened risks, “we like VIX call spreads or VXX longs as a hedge, as well as parts of Defensives,” Tyler’s team wrote. They also recommend stock investors consider boosting their gold exposure as rate cut expectations weaken the US dollar.