Clearview Portfolio Consulting September Market Recap
Key Points:
- The Federal Reserve cut rates as inflation continues to fall and signs of weakness are showing in the labor market
- US stocks hit all-time highs in September as investors hope a recession has been avoided
- Bonds moved higher on the cut in rates, but worries of inflation may reemerge
The Federal Reserve officially started their policy rate normalization this month as it cut the Federal Funds rate 50 basis points (0.5%). Higher interest rates were orchestrated by the Fed in 2022-2023 to combat rising prices. As borrowing costs rise, demand usually falls which leads to lower inflation. The cut in interest rates in September suggests that prices are under control. Keeping rates too high for too long may limit economic activity and cause a recession. The Fed was a bit late to begin raising interest rate when prices increased from high demand from pandemic lockdown spending so cutting by 50bps signals that they want to be ahead of the curve this time.
Stocks pushed new all-time highs as the US economy still seems to be in decent shape. The Fed will be data dependent when making future interest rate decisions and smaller 25 basis point cuts are more likely for the next several meetings. The S&P500 gained another 2% in September, bringing its year-to-date return to over 22%. Consumer discretionary stocks led the market with a 7% gain. Lower interest rates usually increase consumer spending on discretionary items at Lowes and Home Depot and make Tesla’s more affordable. Energy stocks dropped 2.7% in September but further escalation in the Middle East may see energy prices move higher from supply disruptions. Small cap stocks inched up 0.7% after a volatile summer.
Outside the US, Chinese (+23.9%) and Hong Kong (+17%) stocks soared on China’s rollout of a large stimulus package. The Chinese government cut the reserve requirement ratio for banks, lowered mortgage rates, provided liquidity support for equities, and suggested more stimulus to come. This pushed emerging market stocks to outperform developed international for the month and year. The drop in real estate values over the last several years in China have weighed heavily on their economy and stock market.
Bonds moved higher as prevailing yields in the market fell on the Fed rate cuts. The Bloomberg US Aggregate Bond Index gained 1.34% for the month and pushed its year-to-date return to 4.45%. While the Fed may want to continue to cut rates, there are risks that inflation accelerates with continued escalation in the Middle East, increased demand from China from stimulus, rising energy prices and strikes along US ports. The US election seems to be a tight race, adding additional uncertainty to the markets. Heightened volatility in stocks and bonds for the rest of the year should be expected.her than longer ones. Cash investors are enjoying higher yields, but for how long remains uncertain.
Sources: Morningstar Direct, PGIM Investments, Capital Group, Wall Street Journal