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Markets in September 2023 Thumbnail

Markets in September 2023

Investment Insights

  • Stocks continued their decline in August with the S&P 500 down 4.77%. Most of the selloff was in response to rising interest rates as the Fed signaled that rates may need to stay higher for longer. There is also some concern that the U.S. consumer may be running out of spending power as reports indicate that excess pandemic savings may be depleted this quarter.
  • With gas prices rising, as well as student loan payments restarting in October, consumers may not be able to maintain the robust spending that we’ve seen all year. Economic data held up pretty well during the month.
  • The Fed left rates unchanged but signaled that there may be one more rate hike this year. They also indicated that rates could stay higher for a lot longer than markets were expecting. The dot plot showed only two cuts next year vs the four projected in June.
  • The SEP projections also suggest a soft-landing scenario, although Powell pushed back on that being his base case during his press conference. They increased their GDP forecast for 2023 and 2024, while lowering their unemployment expectations.
  • 10-year Treasury yields reached a 16-year high of 4.6% in September from 3.5% back in May. The move higher in yields has pushed most bond markets into negative territory for the year. If they finish the year in the red, this will be the third year in a row that treasury bonds have lost money, which has never happened before in the last 100+ years of available data.
  • The trend of more Union intervention this year continued as the United Auto Workers launched targeted strikes at each of the big three automakers.
  • The average price of gas reached $4.00 per gallon.

Why It Could Keep Going Higher From Here

  • The primary driver of U.S. economic growth is the U.S consumer and Americans still have excess savings they’re able to spend. Although data shows this may be running low.
  • Analysts are projecting that earnings will begin to rebound in Q3.
  • Employment is still strong and that has always begun to slip before a recession.
  • Inflation continues to decelerate and the Fed may be close to pausing rate hikes.
  • There is a lot of cash on the sidelines and investors may put it to work on the fear of missing out.

Biggest Risks

  • Inflation and the Fed’s response to get it under control are still the biggest risks the economy faces currently. Fed policy impacts the economy with a significant lag so it is hard to determine what the future effects will be from the current rate hikes.
  • Most foreign central banks are tightening policy at the same time, which may further amplify a global contraction.
  • Research from the San Francisco Fed shows the excess savings accumulated during the pandemic have likely been exhausted.
  • Employers may need to lay off more of their labor force to maintain margins in a slowing economy.
  • The S&P 500 may be over-valued at 19 times forward earnings.
  • Additional bank failures and commercial real estate defaults.
  • Further Geopolitical tensions.

Economic Data

  • Headline CPI rose 0.6% in August from July. More than half of the increase was due to higher gas prices.
  • Core CPI rose 0.3% in August vs 0.2% expected and 4.3% year over year. Core is 2.4% annualized over the past three months.
  • Retail sales were up 0.6% in August vs 0.2% expected. However, most of the increase was from the increase in gasoline prices.
  • Producer prices increased 0.7% in August vs 0.4% expected.
  • Core PPI in August came in at 2.2%.
  • Core PCE increased by 0.1% in August from July and 3.9% over the year.
  • The University of Michigan consumer sentiment fell to 67.7 in September from 69.5.
  • Existing home sales fell 0.7% in August, following a 2.2% fall in July.
  • New home sales fell 8.7% in August, more than expected and the most in 11 months.
  • The average 30 year mortgage rate hit 7.41%.
  • US Manufacturing PMI increased for the third month to 49. However, anything below 50 is still in contraction.
  • The ECB raised rates by 25 basis points.
  • The Bank of England kept rates unchanged at 5.25% as economic growth slows and inflation slowed to 6.7% in August.

What We Are Doing In The Stock Market

The recent move higher in interest rates have pushed both equity and bond markets lower. Our over-weight to money markets has helped us avoid some of these losses. We have maintained a more conservative posture this year which helped us outperform in September. We trimmed some of our consumer staple allocation this month as they are often looked at as a bond proxy and higher interest rates may negatively impact them. We reallocated those funds to quality equities with good underlying fundamentals.

The recent selloff in August and September wasn’t quite enough for us to make a change to our more conservative stance in portfolios just yet. We will continue to watch the economic dynamic carefully to take advantage of opportunities as they present themselves.