By Pictet AM

There’s an air of panic on the financial markets. Luxury stocks are cracking all over. LVMH and Hermès are lagging on the stock market. But so are rare wines. The Live-ex Fine Wine 50 index, which tracks price trends for wines from a number of major houses such as Margaux, Haut Brion and Mouton Rothschild, has collapsed below its March 2020 level on the London International Vintners Exchange. Virtually no sector seems to have escaped the stock market turmoil of this autumn.

Let’s take a step back. September is always a complicated month in the stock market. It’s the month when the stock market is statistically more likely to go down than up. This month is no exception. Fortunately, October could bring a pleasant surprise. Since the Second World War, there have been 61 stock market rallies with prices rising by more than 10%. On 19 occasions, this has happened in October. The underperformance of cyclical stocks and the outperformance of defensive stocks may therefore be temporary. This is largely due to the uncertainty surrounding US monetary policy, which should be lifted as early as this week, and to exaggerated fears about the possibility of a recession.

Beyond seasonality, which is not an exact science, there is a much more important structural factor that could favor a return to the upside. The fall in interest rates will result in a rotation of money into equities. According to Bloomberg figures, there are $6300 billion in money market distributed as follows: $2500 billion on the retail side and $3700 billion on the institutional side. It’s not all going to flow into equities. That’s for sure. A large proportion of institutional capital will remain in the money market. But on the retail side, it’s likely that much of it will be redirected into equities. That’s the good news this autumn.

Outlook

Finally! The Fed will begin its monetary easing cycle this Wednesday. But not everyone agrees on the extent of the first rate cut. On the one hand, there are the pessimists who see the US economy on the brink of recession and argue for a 50 basis point cut. On the other, there are the realists, of which we are one, who consider the US economy to be in good shape. A 50-basis-point cut would be surprising. In the last 40 years, outside of emergency meetings (such as during Covid), the Fed has only once opted for a cut of this magnitude. In view of the high-frequency indicators, which show a real resilience in consumption, it is hard to see what would legitimize such a choice, which, moreover, would send a signal to the market that the central bank is panicking. We believe that the Fed will instead opt for wisdom…and cut its key rate by 25 basis points, as the ECB did last week.

Statistically, which stock market sector benefits most from an initial rate cut? The consumer discretionary sector…which includes Tesla and Amazon…!

As of September 23, Palantir, Dell and Erie Indemnity (insurance) will join the S&P 500.