UBS strategist warns market rally may stall in August as US growth slows

UBS strategist Andrew Garthwaite warns the US stock market rally, despite the S&P 500's strong year-to-date performance, is poised to stall in August-September. This cautious outlook is driven by signs of slowing US economic growth, including weakening labor data and projected significant deceleration in non-farm payrolls to an average of 48,000 jobs per month in Q4, alongside implied intra-index volatility nearing historical lows and seasonal market weakness. Garthwaite notes the Federal Reserve is unlikely to cut rates before September, limiting near-term policy support and suggesting cyclicals could underperform as volatility reverses, prompting a call for investor caution.

Analysis

According to UBS strategist Andrew Garthwaite, the US stock market's recent rally faces a significant risk of stalling during the historically weak August-September period. This cautious outlook is predicated on a convergence of negative catalysts, including deteriorating macroeconomic indicators and unfavorable market technicals. Specifically, UBS points to a sharp weakening in the 3-month annualized hours worked and employment PMI readings, forecasting non-farm payroll growth will decelerate to a mere 48,000 per month in Q4, with a possibility of turning negative. Concurrently, implied intra-index volatility is near historical lows, signaling a high probability of a reversal; such a rise in volatility has historically been associated with cyclical stocks underperforming 84% of the time. This market vulnerability is compounded by the Federal Reserve's anticipated inability to provide policy support, with no interest rate cuts expected before September, leaving the market exposed to these mounting headwinds despite its strong year-to-date performance.

Key Decisions for Investors

• Investors should consider reducing exposure to cyclical sectors, as they are flagged to underperform significantly if the forecasted reversal in low market volatility materializes.
• It is prudent to monitor upcoming labor market data, particularly non-farm payrolls and employment PMIs, as their deterioration is a core pillar of the bearish thesis presented by UBS.
• Given the seasonal weakness in August and September combined with the lack of immediate Fed support, investors might consider implementing hedging strategies or increasing cash positions to mitigate potential downside risk in the near term.
• Pay close attention to Federal Reserve communications for any shifts in the timeline for interest rate cuts, as a change from the anticipated September start could alter market dynamics and investor sentiment.