Key Points:
- September was a difficult month in both bonds and stocks as investors came to grips with a “higher for longer” stance in yields.
- Energy was the only positive sector of the equity market as oil prices rose.
- Higher yields are being felt across the economy in the form of higher borrowing costs for consumers and businesses.
September lived up to its reputation as a notoriously bad month in the markets. Stocks across the globe sold off after the Federal Reserve indicated that its outlook for rates was higher than expected. There could be an additional rate hike in 2023 to make sure inflation is contained. The S&P500 dropped 4.8% for the month with energy (+2.6%) the only sector in positive territory as oil prices climbed. Real estate (-7.3%), technology (-6.9%) and consumer discretionary (-6%) stocks led the indices lower. Small caps underperformed large caps and value stocks held up slightly better than growth. For the year the Dow Jones Industrial Average is barely holding onto a 2.7% positive gain while the tech-heavy NASDAQ composite is still up over 27%. The S&P 500 is up 13%. Outside the US, developed and emerging markets fell for the month for US investors as the dollar gained against other major currencies.
Yields across the Treasury market increased on the expectation of a “higher for longer” stance for interest rates. The 10-year Treasury Note yield climbed to over 4.6%, a level not seen since 2007. The higher move in longer duration yields pushed the aggregate bond index into negative territory for the year. The benchmark Bloomberg Aggregate Index fell 2.35% in September and is down 1.2% year to date. Long-dated Treasuries and corporate bonds suffered losses while short dated Treasuries remained flat. The Federal Reserve is still in its quantitative tightening mode and is a net seller of its mortgage and Treasury bonds it put on its balance sheet when it provided liquidity to the market during the COVID lockdowns. It may need to re-visit that strategy if the selloff in bonds continues.
The US Government passed a very short-term spending bill to avoid a government shutdown, but the clock is still ticking and this time without a Speaker of the House. The UAW strike poses its own set of challenges and could prove inflationary if car prices begin to rise after finally finding some equilibrium. Manufacturing wages outside the auto industry could rise if the UAW gets the increases it is seeking. The longer and deeper the strike, the more likely it is to cut into US GDP in the months ahead.
The Fed’s aggressive campaign to tackle inflation through interest rate hikes will continue to take time to see their effectiveness. According to JPMorgan, “..investors are in an uncomfortable period of waiting to discover the impact of monetary tightening’s long and variable lags on the economy and markets.” This uncertainty will likely continue to cause volatility in both stocks and bonds for the remainder of the year and into 2024. In times like these, investors tend to be best served by sticking to their asset allocations dictated by their well-constructed financial plans.
Sources: Morningstar Direct, Wall Street Journal, BEA.gov