By: Stash Graham
The stock market weakness from August continued and intensified through September. All stock market sectors saw weakness except for the energy sector. The selling pressure intensified around the Federal Reserve’s renewed hawkishness. Consumer Discretionary (-6.5%), Information Technology (-7%) and Real Estate (-8%) were the sector laggards for the month. For the month, the S&P 500 was down -4.87%. The Dow Jones Industrial Average and Nasdaq Composite fell -3.50% and -5.80%, respectively. On a year-to-date basis, the equal-weighted S&P 500 (SPW) is up +0.27%, and iShares Investment Grade Corporate Bond ETF (LQD) is down -3.9%, year-to-date, illustrating that broadly asset classes both, equity and bonds, continue to muddle around where we started the year. Finally, this past Wednesday, the benchmark 10-year U.S. Treasury yield reached 4.60% for the first time since late 2007. Before conditions began to ease at the end of the week, higher risk-free rates pushed 30-year mortgage loans above 7.75% for the first time in almost 20 years and weighed on stock prices. The need for more monetary policy tightening is restricted by the high volatility of finance conditions and higher longer-term interest rates.
As we have seen in years past, FOMC meetings usually dominate headlines. The Discount Rate/Fed Funds Rate range was left unchanged at the September 19-20 FOMC meeting and was widely expected; however, the updated Summary of Economic Projections (SEP) included a very hawkish upward revision to rate projections for 2024 and 2025, which provided for a negative surprise. The SEP provided that officials have entirely ruled out any recession forecast for this year. Chair Jerome Powell says the goal is to achieve a soft landing for the economy, and the new SEP implies FOMC members are pretty confident about it. Bloomberg Economics’ Federal Reserve watcher, a machine-learning model trained on Bloomberg News headlines on “Fedspeak,” believes there will be one more rate hike (at the November meeting).
A decline in core durable goods orders for the 3rd quarter, rising borrowing costs, and tight credit conditions indicate that companies are reluctant to make longer-term investments. The possibility of a November government shutdown could further weigh down business sentiment. In August, new durable goods orders surprised to the upside, growing +0.2% month over month, but a downward revision offset this in July to -5.6%. The consensus called for a decline of -0.5%, while we expected -0.3%. The overall deceleration in the growth of core capital goods orders indicates a more muted picture than headline figures suggest for August. According to the government figures released this past Thursday (September 28th), U.S. consumer spending rose at half the rate as it had been reported in the second quarter, primarily due to a minor expenditure on services. The third estimate of GDP by the U.S. Bureau of Economic Analysis showed that, during the April to June period, personal consumption rose +0.8% annually. Personal consumption is the primary driver of America’s economy, and its growth rate is at its lowest in more than a year. Per the Conference Board’s September survey, consumer confidence fell in the highest-income households, which is a warning sign of future growth. Rising gasoline prices drag on discretionary income, as do some families who now must pay back student loans. Household financial indicators have deteriorated for the past six months, and more consumers now see a recession as probable over the next 12 months.
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