Good morning! We’re already halfway through the shortened week.

Today’s edition unpacks something odd in the stock market — optimism is soaring even though history says things are about to get rocky.

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Bulls everywhere

Unbothered by recession concerns, labor market weakness, political uncertainty, and seasonality, investors can’t stop buying into the stock market.

September is historically the worst month of the year for stocks, and its first day of trading lived up to that reputation.

With a 2.12% decline, the S&P 500 had its worst start to a month since May 2020, according to Bespoke.

Nonetheless, a slate of indicators suggest bullish sentiment still dominates. 

Bank of America’s Sell-Side Indicator, which tracks the level of stock allocation that strategists are advising for client portfolios, climbed for the second month in a row in August to hit the highest level in nearly 2.5 years.

Data out Tuesday showed that money managers added to their equity positions as volatility ramped up to end the summer. 

Remember, the S&P 500 over the last four Septembers has seen an average 4.2% decline.

Bank of America’s indicator now hovers in “neutral” territory, but it’s the closest it’s been to a “sell” since January 2022.

That sell-side optimism, though, has masked some of the underlying caution. 

“Buy-side positioning reveals funds increasingly bracing for a slowdown,” BofA analysts said. 

Over the last quarter, funds tracked by the firm have backed out of cyclical sectors like materials, energy, and discretionary, while individual investors reported a lower risk appetite in the latest Fund Manager Survey.

Meanwhile, as Gunjan Banerji of the Wall Street Journal reports, the number of retirement funds at Fidelity that have reached $1 million hit a record high last quarter of almost half-a-million accounts, up 31% compared to 2023.

Plus, up to the end of August, US stock funds saw net inflows for eight weeks in a row.

Now, even after the most recent market dip, the S&P 500 has still returned a healthy 16% year-to-date. 

Much of Wall Street sees more upside ahead.

UBS’ chief investment office, for one, forecasts the S&P 500 to finish the year at 5,900, 6.7% higher than Tuesday’s closing levels.

Strategist Ed Yardeni similarly holds a year-end price outlook of 5,800.

Not for nothing, stocks tend to do well following the start of a central bank rate-cutting cycle, something everyone anticipates this month.

A rate cut is all but guaranteed at the September 18 FOMC meeting, according to CME data.

“Historically, in the absence of a recession, the S&P 500 index has gained 17% on average in the 12 months following the first Fed rate cut of a cycle,” UBS strategists told clients Tuesday.

“We see a constructive market environment in the coming months.”

The size of the rate cut will likely come down to the August jobs report, which is due Friday.

To Morgan Stanley CIO Mike Wilson, robust labor market data and a lower unemployment rate could push stock prices higher.  

His team forecasts the US added 185,000 non-farm payrolls in August, while the jobless rate dipped to 4.2% compared to a year ago.

“A stronger-than-expected payroll number and lower unemployment rate would likely provide markets with greater confidence that growth risks have subsided, paving the way for equity valuations to remain elevated and a potential catch-up in some other markets/stocks that have lagged,” Wilson wrote in a note.

Comments or feedback? Hit reply to this email or let me know on X @philrosenn.

Elsewhere:

📉Nvidia dropped 9.5% Tuesday, and it dragged a basket of AI and tech stocks down with it. The chip-maker is still up 118% so far this year, but it has fallen over the last week since it reported solid-but-not-mindblowing earnings. Intel, AMD, Qualcomm and Broadcom all declined to start the week. (Yahoo Finance)

🏭️ Manufacturing data looks sluggish. The ISM report came in below forecasts for the month of August, rising less than expected and raising the specter of an economic slowdown. Factories remain in a slowdown. The report provided the latest evidence to reinforce the odds of a Fed rate cut in two weeks. (CNBC)

🛢️Oil prices have tanked. Brent crude, the international benchmark, has erased all its gains for 2024. The latest price drop followed comments from a Libyan central banker indicating that a deal is coming to revive the nation’s oil output. That could bring more than half a million barrels of crude back into the market from the OPEC member. (Bloomberg)

Rapid-fire:

• The Department of Justice sent subpoenas to Nvidia and other companies for potential antitrust violations (Bloomberg)

• Boeing stock dropped 7.3% after Wells Fargo downgraded their outlook for the airliner (Investopedia)

• The Bank of Canada is expected to cut its benchmark policy rate for the third straight time on Wednesday (WSJ)

• A new Argentine currency launched in an attempt to offset Milei’s rapid economic interventions (Bloomberg)

• The largest pension fund in the US has sold Nvidia, IBM, and Walmart (Barron’s)

Last thing:

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