September Market Recap
Stocks surrendered their positive momentum in September but among the reasons why investors have lost their enthusiasm, at least a US government shutdown is no longer on the list.
Congress passed a temporary funding bill over the weekend, allowing the federal government to remain functional for an additional 45 days while politicians continue to negotiate the details of longer-term spending. The deal has little direct impact on financial markets, other than to divert attention back toward economic challenges rather than fiscal ones.
The fact that the Dow Jones Industrial Average traded nearly 300 points lower on Monday morning compared to Friday’s close is proof that averting a shutdown is not a cure-all for markets. Still, it was a welcomed dose of positive news at the end of a difficult month.
Other than Energy (+2.5%), every sector in the S&P 500 was negative in September, an extraordinarily similar report card from a month earlier. Technology (-6.9%) and Real Estate (-7.8%) fell the most.
Benchmark Returns: September 2023 | YTD 2023
-3.50% | +1.09%
-4.87% | +11.68%
-5.81% | +26.30%
While the impact of seasonality is often overstated, September lived up to its reputation as a historically weak month for stocks. The S&P 500 fell in each of the last four weeks, punctuated by the Federal Reserve’s formal outlook on September 20 that interest rates will likely stay higher for longer.
The Fed did not announce a rate hike last month, but the quarterly update of the Fed’s own projections indicates no rate cuts are expected for another year (September 2024). Keep in mind the Fed “dot plots” are essentially a weather forecast for monetary policy and are certain to change as conditions evolve.
Shorter term, the Fed governors are split close to 50/50 on whether there should be one more rate hike prior to year-end.
The latest inflation reports were in line with expectations, but both the Consumer Price Index (CPI: +3.7% year-over-year) and Personal Consumption Expenditures (PCE: +3.5% year-over-year) showed higher inflation rates than a month earlier. The growing realization that inflation will remain sticky is hurting investor sentiment.
The government’s restatement of Q2 GDP was unchanged from its original estimate and served as affirmation of the 2.1% growth the US economy experienced in the second quarter.
Bond yields and energy prices both rose significantly in September. The 10-year Treasury yield got as high as 4.69%, the highest mark in 16 years. The last time 10-year yields eclipsed 5% was July 2007.
Attractive bond yields are another hurdle for stock prices. When investors can get 5% on money market funds and closer to 6% on investment-grade corporates, the volatility associated with stocks is more difficult to justify.
US small-cap stocks had another dismal month. The Russell 2000 Index fell 6% (after losing 5.2% in August) and is barely positive this year (+1.4%). The average rate on a 30-year fixed mortgage climbed to 7.3%, the highest in 23 years, which will dent discretionary spending for any families looking to move.
Jobs numbers, on the other hand, remain encouraging. The first jobs report of September showed weekly claims had fallen to a 6-month low. The latest job report showed weekly claims near a 12-month low (prior to seasonal adjustments).
West Texas Intermediate Crude increased 8.6% in September, helping the Energy sector to outperform for the second straight month. Oil prices have jumped 35% in the last three months and are back to their highest point since last summer. The average price for a gallon of gasoline is $3.82 per gallon, according to AAA.
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