The rise in the U.S. Dollar, as measured against the Euro and other currencies, ended September at a nearly 12-month high. The U.S. Oil and International Crude indices recorded the highest prices since Russia invaded Ukraine in early 2022. At a yield of 4.77%, the 10 Year U.S. Treasury is at levels not seen since 2007, and rising bond yields helped set the stage for negative September results ending Q3.
These headwinds ultimately were responsible for stock prices retreating, rather than specific company news. The pullback in September was across all sectors but for Energy (+0.4%), with Technology (-10.2%), Real Estate (-7.8%) and Consumer Discretionary and Industrials (both -7.3%) the hardest hit. Utilities (-4.7%) continues as the worst performing sector YTD. The final measure was consumer weakness with rates, expressed by the Fed, to be higher for longer and the specter of a government shutdown, although that has received a temporary stay.
Wall Street wrapped up a tough month last week. The S&P 500 had the largest decline of the year in September and the DOW posted its largest one month decline since February. Rising Treasury yields continued to mount pressure on stock levels. In short, the market developed a buyer’s strike.
S&P 500: Sept -4.87% YTD +11.68%
DOW: Sept -3.50% YTD +1.09%
NASDAQ: Sept -5.81% YTD +26.30%
Russell 2000: Sept -6.04% YTD +1.35%
Sector Performance YTD:
Communication Services +39.4%
Consumer Discretionary +25.7%
Consumer Staples -6.6%
Energy +3.2%
Financials -3.1%
Healthcare -5.3%
Industrials +3.1%
Materials +1.0%
Real Estate -8.0%
Technology +33.8%
Utilities -16.5%
U.S. Treasury Yields:
6 Month Bill 5.52%
2 Year Note 5.09%
5 Year Note 4.72%
10 Year Note 4.73%
30 Year Note 4.87%
The Economy and the Fed:
Inflation remained sticky in Q3, keeping the Fed hawkish despite some moderation. The home builders pulled back along with home purchases as rates (30-year mortgage at 7.31%) and low inventory continue to be problematic.
The labor market remains tight, and consumers are still healthy as personal income/spending printed roughly at what was expected. Student loan repayments resume this month, but any spending loss may be neutralized by excess savings.
ISM’s September Manufacturing PMI was 49, up from the 47.4 print in August. We now have three consecutive months of improvement from the June low of 46. Unlike this contraction, employment PMI printed at 51.2, showing growth.
Fed Chair Powell continues to be data driven. The JOLTS number, that printed Tuesday, showed 9.6 million open jobs in August, up from 8.92 million in July and above the street estimate of 8.75 million. This has upped the chances that another quarter point hike may be in the offing before year-end. It is near twilight for the Fed.
Looking Forward:
A further squeeze on the banking system is likely and could affect bond and stock prices. Even as higher bond yields rattle stock prices, the economy is showing a solid economic outlook for corporate earnings. Coupled with positive jobless claims data, October is working up to a market bottom. This could set the stage for a significant year-end stock market rally. We judge that we are closer to improved prospects for stock price improvement.
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