September Scaries

A curious thing tends to happen around this time of year: Markets get jumpy.

The seasonal explanation is that investors returning from summer vacations start preparing their portfolios for the remainder of the year. If there's rebalancing, it can pull money out of top-performing assets.

But this year, although we could have almost cued the jitters, there are more substantive drivers.

The good news is weakness is not broad-based, and the pullback we've seen since mid-August is very mild. The bad news is there are a lot of elements creating an unfriendly environment for stocks and bonds right now.

Here are the most prominent of these.

Fall Fed Surprises

It's always seemed to me that the Fed tends to surprise or upset markets more often after August. I've never dug around for measurable proof of this, it was just a sense I had. So this week we went looking for evidence — and I'm happy to report I'm not imagining things.

We looked at Bloomberg's Fed Speak Sentiment index, which measures the overall tone of Federal Reserve communications — from dovish to hawkish — over different periods. And as it turns out, the Fed tends to get more hawkish in fall and winter. (Although the upshot didn't surprise me, the clear and consistent seasonality did.)

The takeaway? The trend of a hawkish fall is bearing out, making markets uncomfortable. Since Chairman Kevin Warsh's Jackson Hole speech last Friday, the probability of a September rate hike moved from 35% to 67% (as of this writing).

Yield Curve Control

The drama surrounding bond yields has become a real nailbiter. After an uncomfortable rise in long-term Treasury yields, Treasury Secretary Scott Bessent announced a buyback program on Aug. 19. It was compared to the Fed's Operation Twist in 2011, and initially had a similar effect on the yield curve. The 2-year Treasury yield rose slightly while 10- and 30-year yields dropped.

The problem is, it only worked for one day. As of Wednesday, 10-year yields are above where they were before Bessent's announcement, and 30-year yields are only 2 basis points below where they were.

In my column two weeks ago, I called out the risk that hawkish Fed comments at Jackson Hole could create a tug-of-war between the Fed and the Treasury. Well, here we are. In addition to the old adage “Don't Fight the Fed,” we may need to internalize “Don't Fight the Treasury.”

But what should markets do if the two are fighting each other? It's a tough question to answer. What actually happens when an unstoppable force meets an immovable object? Who knows, but markets have decided to be jumpy. Can't blame them.

September to Remember

Over the next two weeks, everyone will be back at their desks with sun-kissed skin. (OK, probably not everyone). Investors will need to digest data on jobs and inflation, and both could move markets. Then comes the Fed's next rate decision, press conference, and updated summary of economic projections on Sept. 16. News about the conflict with Iran will continue to pour in, too.

Here's to hoping for a month that gives us just enough volatility to keep it interesting and provide opportunities, but not enough to require a column about staying calm during meltdowns.

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