A possible rate cut and US-China trade talks: What to watch in September


Welcome to our monthly stock market outlook, where we preview what the pros will be monitoring and what everyday investors should know. Knowing what's happening in the market can make you a smarter investor and help inform your long-term strategy.

Between escalating tensions in the U.S.-China trade war and mounting recession concerns, it was a wild August for stocks and bonds. The S&P 500 rose or fell at least 1% on half of the month's trading days. That's nearly double the average of 28% of trading days in the past 20 years, according to data analyzed by Grow. On three separate days, the S&P 500 fell more than 2%, something that historically happens about once a month, and it ended the month down 1.8%.

Meanwhile, yields on Treasury bonds slumped, with the rate for the 30-year note setting a new all-time low. Longer-term rates have fallen below shorter-term rates, a dynamic known as an inverted yield curve, which has historically been an indicator of recessions.

Investors hoping for relief may be disappointed, though: September historically is the weakest of the year for the U.S. stock market, according to Yardeni Research.

This month, traders are betting that Federal Reserve policymakers will cut interest rates for the second time this year in an attempt to stimulate economic growth. They're also awaiting new developments in the trade war. Here's what you need to know:

Traders bet the Fed will cut rates again

What's happening: The Fed meets for one of its eight annual meetings on September 17-18, and Wall Street is currently betting — with 100% probability — that policymakers will lower interest rates for the second time this year. Ahead of that meeting, traders will scrutinize speeches from three central bankers, including Fed Chair Jerome Powell, for clues about their next steps.

The central bank sets a benchmark interest rate called the federal funds rate, which affects the rates banks charge you on products like mortgages, auto loans, or credit cards. Traders broadly expect that rate — currently set at 2% to 2.25% — will be reduced to the range of 1.75% to 2% at the September meeting. At their July meeting, policymakers cut interest rates for the first time since the Great Recession.

Why it matters: Amid signs of slower economic growth, both in the U.S. and globally, "lower interest rates are the trend" that's likely to continue for the next several months, says Alan Adelman, a senior fund manager and senior research analyst at Frost Investment Advisors. Traders expect central bankers to cut interest rates in the hopes of stimulating economic activity by making it cheaper for consumers and businesses to borrow money.

What it means for you: If the Fed cuts interest rates again this month, as Wall Street expects, it may make sense to refinance your loans. That's because rates set by the Fed affect how much interest you pay on debt, as well as how much you can earn on your savings.

The stock market likely will experience more bumpiness amid any signs the U.S. economy has slowed further. But don't let Wall Street's recession worries upend your long-term investment strategy. Just make sure your portfolio is well diversified, with a mix of assets (like stocks and bonds) that cut across industries, Adelman says. Stock dividends are earning more for investors than many Treasury bonds, a dynamic that makes stocks more attractive, he adds.

How do economic cycles work?

What's next in the trade war?

What's happening: September began with fresh escalations in the ongoing U.S.-China trade war. On September 1, the U.S. imposed 15% tariffs on $112 billion worth of Chinese goods, while China increased duties of between 5% and 10% on a variety of U.S. goods on a $75-billion target list. Further increases by both countries are expected to take effect in December.

Talks between leaders of the two countries are still planned for September, according to President Donald Trump. The White House has not announced a date for that meeting.

Why it matters: Trade has dominated Wall Street's attention in recent months, and that's not likely to change. "We don't anticipate any resolution in the month of September itself," says Paul Springmeyer, a senior vice president and head of investments at U.S. Bank Private Wealth Management. But if talks proceed as planned, that's a positive sign there's "at least an appetite" on both sides to reach an agreement, he adds.

What it means for you: The latest round of tariffs affected a variety of consumer imports, like milk, diapers, and sports equipment, and will cost the average American household $1,000 a year, according to estimates by JPMorgan. What's more, the escalating trade war could further slow U.S. economic growth and increase the odds of another recession, according to some experts.

With respect to your portfolio, Springmeyer says "there are still opportunities to be had" in the stock market. But as recent months have demonstrated, trade issues could mean an extra turbulent stock market. "Investors should hold steady," Springmeyer says. "Have a patient lens with investing and don't make knee-jerk reactions."

Have a patient lens with investing and don't make knee-jerk reactions.
Paul Springmeyer
head of investments at U.S. Bank Private Wealth Management

The bottom line

Trade and recession worries are likely to continue to rattle the markets — and it's normal for the market to experience bumpiness in any given month. But declines can actually be advantageous for long-term investors who can buy stocks at lower prices.

And while recession concerns are daunting, your best strategy is to stay the course, even if stocks enter a bear market, defined as a decline of at least 20% from a recent high. A recent study by the Schwab Center for Financial Research found that investors who stayed fully invested through the five last bear markets since 1970 were better off than those who sold and sat on the cash for as little a month.

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