“lies, damned lies, and statistics.”
Stock market performance in September 2023:
Overall Market Performance:
September was the worst month for stocks in 2023, with major indices experiencing significant declines [1] [2].
The S&P 500 fell 4.87%, bringing its year-to-date (YTD) return to 11.68%[3].
The Dow Jones Industrial Average decreased 3.4% for the month and 2.1% for the third quarter but remained up 2.7% YTD [4].
The Nasdaq Composite dropped 5.1% in September and lost over 3% for the quarter [4].
Factors Influencing the Market:
The Federal Reserve's stance on keeping interest rates higher for longer contributed to market weakness [5] [4].
Rising oil prices, with Brent crude approaching $95 per barrel, raised concerns about inflation [1] [4].
Uncertainty surrounding the United Auto Workers (UAW) strike, and a potential government shutdown added to market volatility [5].
Sector Performance:
Energy was the only S&P 500 sector posting a gain in September (+2.63%) [5].
Real Estate (-7.25%) and Technology (-6.87%) were among the worst-performing sectors [5].
Bond Market:
U.S. Treasuries, as measured by the Bloomberg U.S. Government Bond Index, fell 2.17% in September [5].
The 10-year Treasury yield reached its highest level since 2007 during the quarter [5].
International Markets:
The MSCI EAFE index, representing developed markets outside North America, fell 3.4% in September and 4.1% for the quarter [4].
Emerging markets, as measured by the MSCI Emerging Markets index, declined 2.6% for the month and 2.8% for the quarter [4].
Looking Ahead:
Investors remained cautious about the Federal Reserve's future interest rate decisions and their potential impact on the economy [4].
Concerns about persistent inflation and its effects on consumer spending and corporate profits continued to influence market sentiment [1] [5].
In summary, September 2023 was characterized by significant market declines across major indices, primarily driven by concerns about prolonged high interest rates, rising oil prices, and geopolitical uncertainties. Despite the setback, many indices still maintained positive year-to-date returns.
Bond market performance in September 2023:
Yield Increases:
Treasury yields surged across the curve, with the 10-year Treasury yield reaching its highest level in nearly two decades, rising to 4.57% by the end of September [6] [7].
The 2-year Treasury yield climbed above 5.00% [7].
The 30-year Treasury yield increased by .49% [8].
Bond Market Performance:
Global government bonds fell by 1.6% (USD, hedged terms) [6].
The Bloomberg U.S. Aggregate Bond Index declined by approximately 2.5% [9].
U.S. Treasuries, as measured by the MSCI USD Government Bond Index, lost 3.4% over the quarter [10].
Factors Influencing the Market:
The Federal Reserve's "higher for longer" stance on interest rates significantly impacted bond yields [7] [8]
Persistent inflation concerns and strong economic data contributed to the yield increases [8] [11].
The Fed's updated Summary of Economic Projections reinforced expectations for a higher rate environment over the near to medium term [8].
Corporate Bonds:
Investment grade (IG) corporate bond spreads widened by 3 basis points [8].
The Bloomberg U.S. Corporate IG Index had a monthly total return of -2.67% [8].
High-yield bonds outperformed core bonds, declining by 1.2% [9].
Market Volatility:
Bond yield volatility, as measured by the Bank of America/Merrill Lynch MOVE Index, spiked at the end of September, reflecting increased uncertainty among investors [8].
International Bond Markets:
Emerging market rates rose broadly, more than any other month in 2023, influenced by rising developed market yields, climbing oil prices, and a strengthening U.S. dollar [11].
Outlook:
The "higher for longer" interest rate narrative prevailed, with yields rising and yield curves steepening across developed markets [11].
Expectations for future rate cuts were reduced, as central banks readjusted their outlook due to sticky inflation in both developed and emerging markets [11].
In summary, September 2023 was characterized by significant increases in bond yields across the board, driven by the Federal Reserve's hawkish stance, persistent inflation concerns, and strong economic data. This resulted in negative returns for most bond market segments and increased volatility in the fixed income space.
Commentary:
September turned out to be a very bad month for both stocks and bonds. As yields continue to rise prices of bonds continue to decline. This is especially true of longer-term bonds. Bonds historically have provided a buffer to downward stock prices. People tend to believe that stock and bonds are negatively correlated, meaning as one’s price increases, the other decreases. While this may be true sometimes, the historical data will show that stocks and bonds tend to have a positive correlation in high stress points such as the 2008 crash, the 2001 crash, etc. September 2023 stocks and bonds both declined.
As we discussed last month, the market is getting mixed messages from Main Street and Wall Street and everywhere in between. A couple months ago we talked about Gen. Z and millennials still financially relying on parents and family members for financial support.
Non-farm payroll numbers were released, and they confirmed some of the suspicion that we found your slowing. In addition to the non-farm payroll, with the jobless claims the increased power ADP employment report show the private employers added approximately 177K jobs in August, well below the consensus numbers and Morgan half of the number jobs in July.
Take a look at this chart below from our friends at Hedgeye illustrating that the amount of total debt all credit cards is increasing combined with higher interest rates, putting downward pressure on summer spending. Credit card balances are increasing at the fastest rate in 20 years year over year at the same time.
Mainstream media will tell you this record $1 trillion of US Consumer Credit Card debt it positive for the US economy, Alan Sands would say otherwise. Unlike the federal government, households do not have the ability to print their own money. Thus, as their car payments and other debt obligations become more and more of their annualized budget, their ability to spend on other items continue to decline, thus feeding into the recession narrative of a Quad 4.
This is not just an issue in the US; Europe along with parts of Asia continues to struggle with their economies. Manufacturing PMI (Purchasing Managers Index) continues to fall to the lowest levels July 2020, the depth of the COVID-19 pandemic. Decreasing by 7.6% year over year compared to 3.4% year over year this time last year.
Conclusion:
The market performance combined with the data that we are seeing in the market is indicating that we are heading into a market pullback. Will this pullback be sustained, or will we have a sharp rebound in October and throughout the fourth quarter of 2023? No one has a crystal ball. The data is still supporting a very conservative approach to the markets leaving us and still a defensive position overall.
Model Performance Update
Our Moderate model portfolio returned -1.72% during the Month of September and finished the month with -.41% Year To Date through the end of September (see charts below).
Hedgeye had its mid quarter call on 9/7/2023. In this call they state that government spending is up over 11% YTD, resulting in an unexpectedly high GDP for the first 3 quarters of the year. They expect the third quarter to be the last positive Q/Q GDP print as it turns flat-to-negative heading into 2024. Our notes from the call are as follows:
Retail sales (including restaurants and necessities) are down significantly since July. The high cost of living is squeezing disposable income and pushing the bottom 50% further into negative savings territory. Consumer foreclosures, bankruptcies, and loan delinquencies are at Great Financial Crisis levels. Credit card balances and delinquency rates are rising. Consumer loan rejection rates are at all-time highs. Companies faced with higher labor, input, and capital costs can no longer pass on price increases. Labor hoarding is coming to an end as companies have announced more layoffs. Corporate credit downgrades have reached a 10-year high. Business bankruptcies increased in July and August. Historically, rising bankruptcies has been a precursor to a credit event.
On 9/28/2023, Hedgeye had its end of quarter call where they reiterate their call for a U.S Recession and credit event to occur in the future. We will continue to hold off on additional stock buys, given the high rate of volatility in the Hedgeye Signals to date.
Changes to Model Portfolio during the month of September
- Increased T-bill exposure from 20% to 30%
- Trimmed BTAL to 4%
September 2023 performance with benchmark
2023 Year to Date Performance with Benchmark
If you were to have any questions regarding the above, please reach out to us to set up a one-to-one meeting to review your situation.
Sincerely,
Bryant Andrus, MSF, CFP®
President
SBC Investment Management
P: (602) 641-5996
M: (319) 520-2033
E: bandrus@sbcinvestmentmanagement.com
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[1] https://markets.businessinsider.com/news/stocks/stock-market-analysis-charts-data-september-effect-federal-reserve-inflation-2023-10
[2] https://www.nasdaq.com/articles/monthly-market-wrap-september-2023
[3] https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes-september-2023/
[4] https://www.usicg.com/publications/market--legal-update/mlu-container-page/mlu-09-2023/
[5] https://www.cashdollarandassociates.com/september-monthly-market-report
[6] https://www.rothschildandco.com/en/newsroom/insights/2023/10/wealth-management-monthly-market-summary-september-2023/
[7] https://apnews.com/article/off-charts-bond-yields-stocks-124a09150a273e4f169ff35ba16d692a
[8] https://www.breckinridge.com/insights/details/september-2023-market-commentary/
[9] https://www.adviceperiod.com/blog/september-2023-market-commentary/
[10] https://www.msci.com/www/blog-posts/markets-in-focus-narrow-yield/04096700508
[11] https://www.morganstanley.com/im/en-us/individual-investor/insights/articles/september-slump-a-real-story.html