Next week is going to be a big one - with the FOMC interest rate decision on Wednesday, Sept 17th, and the Quad Witching on Friday, Sept 19th.
First, let’s look at Quad Witching, then we’ll go in-depth on the FOMC interest rate decision front and the context around it prepare for what to expect from the markets.
Quad witching is a quarterly event on the 3rd Friday of March, June, September, and December when 4 types of financial derivative contracts expire simultaneously:
Stock index futures, stock index options, stock options, and single-stock futures.
This simultaneous expiration often leads to increased trading volume and activity as traders adjust their positions, which can cause temporary spikes in volatility and price movements.
The chart below shows the S&P 500 performance heading into and out of September Quad Witching.
The first 4 days after the event, which in this case would be Sept 22nd to Sept 25th (Monday to Thursday) is where the likely pullback occurs.
But, is this potential dip an actual buying opportunity or is the economy/labor market too weak and heading into a recession?
For that, let’s turn our heads to the upcoming FOMC event and the context around it.
Markets are now pricing in a 89% chance of a 25bps rate cut and 11% chance of a 50bps rate cut following the poor jobs report from last Friday, primarily led by non-farm payrolls (job creation) being very low and some of the previous numbers being sharply revised downwards.
So, we basically have a 100% chance of a rate cut this coming week.
This means the Fed is about to join the rate cut party, perhaps a little late as everyone already knows by now…
Global central banks have already done a total of 88 rate cuts this year - the 2nd fastest rate cut pace in history outdone by only 2020.
With these Fed rate cuts that are coming, either the market will continue going up aggressively or it’ll be followed by a sharp decline (obviously!)
But the likelihood of which scenario plays out comes down to 1 thing - US recession.
After all, in most cases the Fed has only cut rates near recessions, which has led the stock market on some sharp declines.
However, that didn’t happen in 3 cases - 1966, 1984, and 1995.
All 3 times, the Fed cut rates without a recession and that was actually bullish for the stock market (green highlights).
So now the question is: With the US labor market weakening today thus leading to rate cuts by the Fed, is the US economy tipping into a recession here?
That’s exactly what we’ll answer in the next section in a data backed fashion.
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