The markets continued their decline for the month of September, logging their worst month since last December and the first back-to-back monthly declines in over a year. Retail stocks, tech, utilities, REITS, and home improvement stocks (Lowes -10%) were all down significantly. Even The Magnificent 7 that carried the first half of the year weren’t immune to September’s pullback; Nvidia lost -11%, Apple lost -9%, etc. (Meta / Facebook was the only 1 of the 7 to eke out a gain, +1.5%.) The Equal Weight Index has officially crossed back into negative territory for the year. That’s much more telling of the current state of the markets for us than simply looking at the S&P 500.
We thought we were overdue for a bit of a correction coming out of the great first half of the year and we’ve reminded clients that a -10% correction is normal even in the best of years. The S&P is now off -9% from its recent highs. Some of that can be attributed to seasonality as Aug / Sept are typically under-performing months for the markets with the 1st week of Oct being the worst. Here’s the YTD numbers:
Brokered CD Rates
While we expect stocks to have volatility, we often forget that bonds can also have wild swings, too, and that’s been the bigger surprise this past month. The benchmark for interest rates is the 10 yr US Treasury bond; it was only a few months ago it was at 3.50%. It recently spiked to 4.70% which is a massive move for bonds in a short amount of time and puts them at their highest rate since Aug 2007! The higher the 10 yr Treasury climbs, the more pressure that puts on stocks and bond values drop. (Ironically, this move higher has come as inflation has come down dramatically.) The bond market is clearly trying to find its equilibrium.
If there’s one dominant theme weighing on sentiment right now, it’s this: rates higher for longer. The Fed may not have hiked rates at their last meeting, but they did throw a bucket of cold water on the expectations they would cut rates by year-end or even early 2024. We were never in the camp they were cutting rates in 2023 but it does appear the street is finally accepting the fact that higher rates are here to stay, at least for a while. The US consumer is the biggest driver of the economy (70% of GDP in fact) and thus far has carried the economy when most were calling for a recession to have occurred by now. We always felt like those calls were too loud and too early but, at some point, they will be justified.
Mortgage rates are nearing 8% while car loans are 10% and prices of both have skyrocketed post-pandemic. Credit cards are 20%, student loan repayments are starting back up, and the consumer will be running out of pandemic savings soon if they haven’t already. Raymond James economists are calling for a mild recession 1st quarter of 2024 and I think you can make an argument it may actually be a good thing at this point. Recessions are a normal part of economic cycles and are a natural way for asset classes to “reset”. That would also be the needed catalyst for the Fed to start cutting / normalizing rates. What are “normal rates”? I think it depends on who you ask and when, but it should not be artificially low, 0% Fed rates, nor should it be 8% mortgages. Will the Fed cut rates before a recession starts and have the mythical no-landing / no recession? History says probably not but at this point I think it’s ok to simply acknowledge that nobody knows the future…anything is possible.
That’s not to say there’s no reason to be optimistic. For starters, the unemployment rate is still extremely low. The labor market has shown small signs of softening recently but it still remains very strong. (Even the participation rate has improved). While we all hate high borrowing rates for homes, cars, and credit cards, they are at least manageable if you have a job. Don’t underestimate the strength of the American economy at full employment.
Inflation continues to decline faster than it went up and you can argue retail goods are actually in disinflation mode. Gas and food remain stubbornly high, but I’m not convinced the Fed can do much to control commodity prices, which trade on a global scale.
Lastly, at this point, the markets are solidly in oversold territory and still down from their highs from January 2021. That makes for excellent long-term opportunities to buy quality stocks at depressed prices for serious investors. With cash and bonds both paying well over 5% now, a balanced portfolio is finally earning something while we wait for equities to rebound. The final months of the year are historically some of the strongest. Will that prove to be true again this year? We’ll see soon enough.
In lieu of a Useless Fact of the Month, I’ve opted to share a favorite Quote of the Month. This one comes from VP of Berkshire Hathaway, Charlie Munger. Charlie has been Warren Buffet’s right-hand man since 1978 and a big part of Berkshire’s incredible track record. He recently celebrated his 99th birthday which makes this quote even better. When asked to reflect on the current state of the markets, economy, and inflation, he thought a bit of perspective was in order:
“If I can be optimistic when I'm nearly dead, surely the rest of you can handle a little inflation.”
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