Goodbye September! No, really, goodbye. In last month’s commentary, we quoted a statistic that September is the worst month of the year for the markets dating back to 1950. So, while we expected a bit of a pullback, we didn’t expect that much of one! The S&P 500 logged in a whopping-9.34% for the month. There was no place to hide to put it frankly. Virtually every asset class declined with growth leading the pack on the way down; even gold is down over 10% YTD. In what has proved to be one of the wildest months for fixed income in recent memory, the 10 yr Treasury climbed dramatically, even crossing 4% at one point before pulling back.(That may not sound like a lot, but that’s a major swing for bond rates in such a short amount of time). This wild fluctuation in rates pushed 30 yr mortgage rates over 6.50%(the highest since 2008)& CD rates spiked an entire percentage point.(See rate chart below) So when we say “Good riddance to September” we mean it.(That was a long-winded way of telling you that your September statements won’t look great.)
Inflation is still the number one point of contention right now and the debate clearly is how high the Fed will have to raise rates to break inflation, and for how long. Our crystal ball is in the shop right now, so we don’t have an answer on this one, but the thinking that inflation has most likely peaked did get more supportive data this month.
- Commodity prices are pulling back significantly: Lumber-67%, Oil-29%,Copper–27%, &Cotton futures are down-40% from the peak in May, Wheat-32%, Corn-13%, & Soybeans-26%.
- Freight rates are-70%fromthe peak
- Income & wage growth are decelerating from 2021 levels
These are all leading indicators that hopefully bring us lower inflation numbers at some point sooner rather than later. The sooner inflation is under control, the sooner the Fed can ease off the interest rate hikes which in turn, should reduce the severity and length of a recession.
And while the bond market had a rollercoaster ride the past couple of weeks, it has brought us some of the best rates we’ve seen in years. Short-term Treasury’s (1-3 year) are between 3.80–4.09% as of today. We are seeing yields well over 5% right now with investment grade Corporate Bonds, and even Brokered CD’s have joined the party by tipping 4%:
There is no way to sugarcoat it though: the bear is in charge right now. In past commentaries, we quantified the difference between a“non-recessionary” bear market & a“recessionary” bear market. It certainly appears we’re in the latter now; so, we’ll remind you a bit of context: The average recessionary bear market is 33% over a 13-month span. As of right now, we are 24% in 9 months. While every bear market is different, if this current bear behaves like the averages, the bad news is we could still have another 10% or so to go in the coming months. The good news, for the optimists out there, is that we could be about 3/4 the way through this thing.
We really like this recent commentary from Mike Gibbs, Raymond James Director of Equity Portfolio & Technical Strategy:
“While it is easy to become increasingly more short-sighted in volatile periods, we remind investors that a lot of negative news has already been priced in at current levels. High inflation is an issue, but leading indicators suggest it should improve-the timing and degree are the unknowns. Equities likely still contain downside in the short-term (weeks to months), but don’t lose sight of the long-term bull market opportunity on the other side of the current weak trend. Bull markets go up 152% on average and last for years.”
Lastly, we can’t end without mentioning the “October Effect”. Popular myth has it that October can bring surprise market crashes. (i.e., Black Monday, October 1987, the Crash of 1929 on October 24th,1929, etc.) However, the reality is that October has ended more bear markets than any other month. While we’d love to say that’s possible this month, we don’t think we’ll be that lucky this year.
And while we’re talking about animals, here’s your Useless Fact of the Month:
The official animal of America is the Bald Eagle, of course. England’s is the Lion. Canada has 2: the Beaver & the Canadian Horse. What is the official animal of Scotland you ask? The Unicorn. Feel free to fact-check us on that one if you don’t believe it!
Please reach out if you have any questions on your portfolio or would like a review.
As always, thank you for being a client.
Sean & John