Will the U.S. Stock Market Crash in September? Looks Likely

Historically, September has been the worst month for U.S. stocks. As we enter September 2022, investors are wondering whether stocks will crash this year too. Here’s what could drive markets in the crucial month and what different market participants have to say on the trajectory of U.S. stocks.

U.S. stock markets have now pared their August 2022 gains after the Federal Reserve made it unequivocally clear that it's going to raise interest rates until inflation comes down. The hawkish comments sent bulls running for cover as many were batting for a Fed pivot, or the shift from rate hikes to rate cuts.

We don’t have a logical answer to what makes September the worst month for stocks. However, it has been the worst month for stocks with average losses of around 0.5 percent. U.S. stocks crashed in September 2020 and 2021, which were otherwise good years for markets with the S&P 500 rising over 20 percent in both years.

While it's tough to predict the market’s short-term trajectory, there could be a U.S. stock market crash in September. At least two brokerages — Bank of America and Morgan Stanley — have doubted the sustainability of the U.S. stock market rally in July.

Stocks continued to rally in August also before the Fed punctured the bulls’ "pivot narrative." The Fed's July meeting minutes and Fed Chair Jerome Powell's comments at the Jackson Hole Symposium made it clear that the Fed isn't shying away from rate hikes even as they bring “pain.”

Michael Burry has been warning of a big stock market crash for the last few months. Many see his predictions as alarmist, especially as some haven’t materialized since his epic bet against the housing market in 2008. However, in a typical case of “practicing what you preach,” Burry has sold all the stocks that his Scion Asset Management was holding. He added a small position in GEO Group stock but has moved the portfolio to cash.

Burry thinks that while stock market multiples have fallen, earnings compression would follow. The second-quarter earnings season was quite mixed but given the tepid expectations, markets sent some stocks like Microsoft and Alphabet higher even after mixed earnings.

Jim Rogers has also been warning of a market crash and a big bear market. He thinks that the current rally, which started towards the end of June, will be the last before a bear market hits U.S. stocks.

In the first week only, we’ll get the PMI data. China’s PMI data will be crucial as its economy has been slowing down. The data points will shed light on the country’s troubled real estate sector.

The U.S. job numbers and inflation data will also be important because they set the tone for Fed’s rate hike decision later in September. As things stand now, a third rate hike by 75 basis points appears to be on the table. The Russia-Ukraine war is another factor. Russia might resort to harsher tactics, including weaponizing energy exports, as it hasn’t been successful in winning the war despite it now stretching into the seventh month.

Not everyone thinks it's all gloom and doom. JPMorgan expects U.S. stocks to rise to a record high before 2022 ends. September will be a crucial month. In the absence of major earnings, September will mainly be about economic data, the Fed, and geopolitics.