U.S. markets were on the quiet side last week in a holiday-shortened trading schedule, with the S&P 500 closing out its best four-week stretch of gains in a year.
Overall, the S&P 500 added 1.00%, the Nasdaq 100 tacked on 0.91%, and the Dow Jones Industrial Average rose by 1.27%.
Federal Reserve Minutes: No Hints of Cuts
According to the most recent Federal Reserve (Fed) meeting minutes, Fed officials don’t seem so gung-ho about cutting interest rates anytime soon, despite the market’s wishes.
Members appear to be concerned that inflation could be sticky or even move higher and that more work may need to be done.
“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time,” the minutes said.
To put this in “non-Fedspeak” context, the most recent Consumer Price Index data showed inflation running at an increase of 3.2%, and the Fed’s job is to get this number down to 2%. As such, there is still work to be done.
Fearless Markets?
Overall, major U.S. equity markets have been calm in November. The index that tracks market expectations of volatility in the short-term declined for the fifth straight week last week, indicating little fear was present in the S&P 500 as of market close.
In fact, last week, this index, the $VIX, closed at levels not seen since January 2020 on a weekly closing basis.
Things change quickly! Rewind to October, and the $VIX was nearly 84% higher at its monthly high than last week’s closing level.
Presumably, some investors were “shaken out” by the volatility, fear, and headlines featured in October and missed out on the subsequent gains in recent weeks. Investing for the long term reduces the risk of such happenings!
Home Sales Drop in October
Existing home sales dropped 14.6% in October versus the year prior, a 13-year low.
Let’s remember that October coincided with 10-year note yields flirting with 5% (and consequently higher interest rates), so a slowdown in existing home sales can’t be too surprising. Interest rates have retreated somewhat in November.
“Prospective home buyers experienced another difficult month due to the persistent lack of housing inventory and the highest mortgage rates in a generation,” said Lawrence Yun, the National Association of Realtors’ chief economist.
November could show some improvement in residential real estate activity, with 30-year fixed mortgage rates decreasing from October levels and recent signs of inventory inching higher.
Holiday Shopping Outlook
Early indications were that the consumer may have a soft holiday shopping season.
But on Black Friday, the Teflon Consumer struck again, with shoppers spending a record $9.8 billion in online sales. This number was up 7.5% from last year — wow!
What brick-and-mortar sales look like once the totals have been tallied is yet to be seen. Some folks note that inflation-pinched shoppers are holding out for deeper discounts, but you wouldn’t know that from the online sales data that is available so far.
Post Turkey-Week
Since the next jobs report is not due out until December 8th, the big economic report of this week will be the preliminary U.S. gross domestic product (GDP) growth (quarter over quarter) data on Wednesday.
We will also get the Fed’s favorite inflation metric in Core Personal Consumption Expenditures (PCE) on Thursday.
Throughout November, major U.S. equity indexes have exhibited continued strength after a dismal October. We will all be looking to see how the month closes out this week as we approach the final month of 2023.
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Overall, major U.S. equity indexes maintained their recent positive momentum last week, courtesy of consumer pricing data coming in below expectations. This key data release begs the question: Is inflation in the rearview mirror?
Tallying last week from a numerical perspective, the S&P 500 rose by 2.24%, the Nasdaq 100 increased by 1.99%, and the Dow Jones Industrial Average was higher by 1.94%. The small-cap Russell 2000 Index, which has become a topic of conversation lately, rose by 5.42% last week.
Inflation Cooler
Last week was overall a quiet one for economic data releases, but Tuesday did bring the much-anticipated Consumer Price Index (CPI) data release.
The report did not disappoint market bulls. Consumer inflation showed a 3.2% rise year-over-year in October, a two-year low that was below Dow Jones estimates of 3.3%. Core inflation, which strips food and energy from the metric, fell to the slowest annual pace since September of 2021, at 4%; this was also below analyst expectations of 4.1%.
Falling energy prices helped the headline (i.e., overall) figure, with oil and gas prices dropping in October.
Stocks have been behaving like inflation is in the rearview mirror. However, it’s worth remembering there is still work to do to get inflation back down to the 2% Fed target rate.
Interest Rates Fall
Cooler inflation = lower interest rates – sounds about right!
Treasury yields fell hard last Tuesday on the CPI data, down to levels not seen since September, closing the week near 4.442%. This was a decrease from the previous weekly close near 4.629%.
Popular mortgage product rates fell in tandem with the 10-year Treasury yield last week. Average 30-year fixed mortgage yield declined to near 7.4%, great news for would-be homebuyers! In turn, mortgage applications saw a 3.04% jump for new purchases.
7.4% is not a “low” rate, but it is a welcome sight for many would-be borrowers, as average 30-year fixed mortgage rates were above 7.75% in October.
Federal Reserve (Fed) Expectations
Markets are currently pricing in a 25-basis-point rate cut in May of 2024 and a full percentage point (100 basis points) in cuts by the end of 2024, per the CME Fedwatch Tool. The softening October consumer inflation data certainly helped to reinforce this outlook, but don’t expect interest rates to suddenly drop like a brick; it ought to be a process, and other factors are still in play.
For the next Fed meeting in December, market expectations currently show a nearly 100% probability of no change in interest rates as of last week’s market close.
Fedspeak comes and goes, but let’s remember that the Fed has broadcasted that rates could stay higher for an extended period.
Consumer Slowdown?
The all-important holiday shopping season is suddenly here! Will the consumer continue to shock analysts and spend, spend, spend?
The reality of an extended period of higher interest rates and inflation could set in for many Americans this season, with early indications showing that holiday shopping spending is off to a slow start this year.
The most recent University of Michigan Consumer Sentiment data showed consumer sentiment at a six-month low. This is some food for thought as we approach the holidays and year-end.
The Takeaway
Expectations for a softer Fed and inflation cooling further are the key drivers in the markets right now. Long-term investors were rewarded in November after a challenging month of October.
Falling energy prices have helped to cool headline inflation, and market watchers will be looking for more price softening going forward. At the same time, the consumer has possibly endured high rates and inflation for a long enough period to dampen the holiday shopping season. Overall, stocks seem to be very comfortable with the present narrative at the time of writing.
Lastly, a sliver of good news for Americans: Treasury yields are off their recent highs, which could help to spur lending activity and jumpstart a rather stale and inactive housing market.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Everyone wanted to know last week: Can stocks hold their gains after the best week of 2023 for the S&P 500? They sure could, as major U.S. equity indices finished the week moderately in the green.
Overall, the S&P 500 increased by 1.31%, the Nasdaq 100 rose by 2.85%, and the Dow Jones Industrial Average was higher by 0.75%.
Federal Reserve: Dovish or Hawkish?
Is the Federal Reserve (Fed) done raising rates? The collective market certainly got that indication during Federal Reserve Chair Jerome Powell’s commentary after the November Fed meeting.
But fast forward a week and a half or so, and the Fed seemed to put somewhat of a damper on expectations.
“The Federal Open Market Committee is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2 percent over time; we are not confident that we have achieved such a stance,” said Powell at the International Monetary Fund (IMF) annual research conference.
Not Transitory
Powell sure didn’t sound very confident (his words, not mine)! However, it’s worth keeping in mind that he can’t just broadcast a message of inflation suddenly being under control and that rate hikes are complete. Do you remember when he said inflation was “transitory” when the cycle began? Well, he isn’t going to make that mistake again!
Major U.S. stock indices fell on Powell’s commentary last Thursday, while Treasury yields rose. The initial response on Thursday was quickly reversed by a strong day on Friday for major U.S. stock indexes, as the Dow, S&P 500, and Nasdaq 100 cemented a second consecutive week of gains.
Inflation Data on Tap
It’s time for the monthly check-in on inflation via the Consumer Price Index (CPI) on Tuesday and wholesale pricing via the Producer Price Index (PPI) on Wednesday.
Markets have gotten accustomed to the last two CPI prints coming in at a 3.7% year-over-year gain. For October, Factset estimates are for a 3.3% rise year-over-year, which would be a decline from the last two readings.
Given the recent Fed commentary, the market may want to see some more evidence of inflation getting under control before continuing with its celebration.
November Seasonality
Just when market sentiment was super bearish towards the end of October, November started with a bang for the bulls, and the momentum continued last week.
Since 1950, November has typically been the best month for stocks on average. The seasonal stock market strength often continues into December, giving way to the Santa Claus Rally.
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After stocks posted a dismal October, a fresh month seemed to make all the difference in sentiment and risk appetite.
Overall, the large-cap S&P 500 added 5.85%, the Nasdaq 100 increased by 6.48%, and the Dow Jones Industrial Average rose by 5.07%.
Fed Unchanged
As was widely expected, the Federal Reserve (Fed) left rates unchanged at its November 1st policy meeting. No surprises there, but the Fed rate decision still sparked a giant stock rally Why?
It’s not always about what the Fed does, but what the Fed doesn’t say or what it gives clues about. Yes, it is somewhat of a passive-aggressive relationship with the Fed and the markets.
Since Federal Reserve Chair Jerome Powell did not say much about raising rates further, the market expectations that the Fed is finished raising interest rates increased last week. It is important to note and emphasize that Powell did not explicitly say that rate hikes are complete.
As of the close of last week, the market is favoring a 25-basis-point rate cut in May of 2024, according to the CME FedWatch Tool.
Markets like to look ahead to the future. Perhaps markets got ahead of themselves last week, perhaps not.
Softer Jobs Data
Softer employment data is what the Fed and markets want to see. It got its dose last week, with October Nonfarm Payrolls coming in at 150,000 vs 170,000 expected.
Major U.S. equity markets cheered the softer jobs number last week and extended their rally on Friday, making it five up days last week in the S&P 500.
United Auto Workers (UAW) auto strikes factored into the data, contributing to a decline in the manufacturing sector. Healthcare, government, social assistance, and construction jobs were areas of strength.
The weaker-than-expected jobs data added some confirmation to last week’s rally on the basis that the Fed’s rate hikes are having the intended consequences of slowing the economy.
The Takeaway
Market sentiment can shift on a dime. That is exactly what happened last week.
After some tough sledding in October for major U.S. stock indexes, November 1st was a monumental day.
Oversold markets and market sentiment showing a high level of bearishness at the end of October gave way to an optimistic (and widely watched) quarterly treasury refunding on November 1st, followed by a Fed that left rates unchanged and Fed commentary that was perceived by many as dovish. All on the same day.
Is the Fed really done raising rates, and can the market really expect a rate cut in May of 2024? Is that too soon? Employment data showing some softening helps to show some evidence of a slowdown, just what the Fed needs to tame inflation. Markets will look for further evidence of inflation slowing at the next CPI reading on November 14th.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Higher treasury yields, geopolitical risk, and a strong U.S. consumer dominated the headlines in an eventful trading week.
Looking at last week, the S&P 500 fell by 2.39%, the Nasdaq 100 traded lower by 2.90%, and the Dow Jones Industrial Average decreased by 1.61%.
Relentless U.S. Consumers
The resilience of the U.S. consumer has proven impressive. Retail sales rose 0.7% in September versus August–exceeding the Dow Jones estimates for a 0.3% rise. Retail sales data figures are not adjusted for inflation.
Miscellaneous stores led the way with an increase of 3% over the month. Many folks will ask, ”What is a miscellaneous store?” It seems many Americans are spending their money in a more value-oriented fashion–at retailers like thrift stores offering used merchandise at discount prices.
Impacts on the Fed
The Retail Sales report is of great importance, as it can contribute to the future of the Fed’s monetary policy. Markets are currently pricing in a Fed that is done hiking rates during this cycle (though this can change). With the consumer being so strong, however, the Fed’s job can become more challenging.
Again, the Retail Sales data is not adjusted for inflation–so a rise in sales could potentially be partially offset by higher prices.
Credit card balances continue to climb to record levels too, topping $1 Trillion in the most recent Household Debt and Credit Report issued by the Federal Reserve Bank of New York. That is Q2 data, and we should get Q3 data over the next month.
10-year Note Yields Rise
Equity markets were hanging on to the moves of 10-year treasury yields last week, seemingly paying attention to each change or tick with high sensitivity.
The benchmark yield touched a high of just under 5% last week, peaking near 4.993%, and settling last week near 4.923%.
Some treasury market analysts have cited a supply imbalance in the treasury markets. Given the current state of the U.S. government deficit, investors (countries, institutional investors, individuals, etc) are demanding a higher rate to take on the U.S. debt. Notably, households are taking on U.S. debt (buying treasury notes and other products) at an increasing rate.
Powell Speech
FOMC speeches were plentiful last week. The highlight was Fed Chair Powell’s prepared remarks at the Economic Club of New York.
Notable takeaways from Chair Powell’s luncheon remarks include, “Inflation is still too high, and a few months of good data are only the beginning of what it will take to build confidence that inflation is moving down sustainably toward our goal.”
You can catch the full Chair Powell speech here.
Uncertainty Pulls the Strings
Markets like clarity and certainty, and we have a healthy dose of the opposite right now. The Middle East, persistent inflation, unknown Fed policy, and rising bond yields are all factoring into the fear equation.
The “higher for longer” interest rate scenario seems to be holding up in recent months. Portfolio adjustments can often be wise and may potentially help an investor’s bottom line over time. Snap decisions, though, have the potential to hurt investors over time.
We are in a seasonally strong time of the year for U.S. equities, although many macro headwinds are fighting the trend. Should market volatility continue, remember that the most successful long-term investors are often fearless in nature.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Major U.S. stock indexes digested hotter-than-expected inflation data and tensions in the Middle East last week, finishing the week in a mixed yet resilient fashion.
Tallying the numbers, the S&P 500 added 0.45%, the Nasdaq 100 increased by 0.15%, and the Dow Jones Industrial Average rose by 0.79%.
Warming Inflation Data
Remember that cooling inflation trend? Wait, not so fast!
Producer Pricing Index (PPI): Producer pricing (wholesale pricing) showed a rise of 0.5% in September versus the Dow Jones estimate for a 0.3% rise. Markets didn’t seem to mind, with major U.S. stock market indexes showing only mild reaction and the S&P 500 finishing in the green last Wednesday.
But PPI was just a warm-up, or an appetizer, if you will.
Consumer Price Index (CPI): Released the next morning, consumer pricing for the month of September showed a bit hotter-than-expected data reading, at a 3.7% year-over-year rise versus estimates for 3.6%. On a month-over-month basis, data showed a 0.4% increase in consumer pricing vs. 0.3% expected.
Segments attributed to the rise included shelter (including rent) and energy. A bright spot was the price of food staying mostly stable.
While markets didn’t seem to mind the hotter PPI, CPI was a different story, with the S&P 500 finishing the daily session lower but in an orderly fashion. Tensions in the Middle East also picked up on the same day, so it is tough to pinpoint what the market was trading on more heavily.
We do see that inflation is still sticky, however. And at the end of the day, the consumer is the tail that wags the dog of the economy. That’s why markets care so much about CPI and not as much about PPI.
Moderating Treasury Yields
Treasury yields declined modestly last week, perhaps finding safe-haven demand from buyers on Middle East turmoil. The 10-year yield had its first weekly drop in the last six weeks yet remains “elevated,” closing the week near 4.628%. We have yet to trade at or above the psychologically critical 5.000% level in the 10-year note yield during the recent rise.
There is some chatter and logic about the “market doing the Fed’s work” with traders and investors pushing yields higher in the long-duration Treasuries like 10s and 30s. The market pushing the yields higher overall can contribute to chilling the economy and potentially translate to a Fed that is less eager to hike shorter-term rates.
FedWatch
Speaking of the Fed, the November meeting is just about two weeks away, and the chances of a 25-basis-point rate hike at the meeting declined last week. As of the market close on 10/13, probabilities showed a 93.8% chance the Fed leaves rates unchanged at the November meeting versus around 72.9% seven days prior.
When will the Fed cut rates? It’s what everyone wants to know. At the time of writing, the market favors a cutting Fed in the second half of 2024, according to the CME FedWatch Tool.
A lot can happen between now and then, and it is unlikely to see rapidly declining interest rates anytime soon.
Earnings Season Kickoff
Earnings season kicked off with major banks last Friday, as JPMorgan Chase, Citigroup, and Wells Fargo all reported quarterly results and growing profits. This week gives us more bank earnings as well as Netflix and Tesla quarterly results.
As of last week’s market close, some analyst estimates were calling for S&P 500 earnings (blended, year-over-year) for all companies to rise by an average of 0.4% overall, according to data from FactSet. If we get an actual earnings growth rate of 0.4% for the quarter in the S&P 500 companies, it would be the first quarter in the last four with year-over-year earnings growth.
It is a dynamic market backdrop right now: think earnings versus geopolitics and higher rates.
Middle East Sends Oil, Gold Higher
After one week of notable declines in crude oil pricing, the price of U.S. Crude Oil (West Texas Intermediate) rose, with the November contract higher by 5.92% and closing the week near $87.69 per barrel versus the previous weekly close near $82.79.
In classic geopolitical fashion, gold also rose on the Comex Exchange last week, with the December contract adding 5.22% to close near $1941.50 per troy ounce. Most of last week’s gains in gold came on Friday, as tensions escalated in the Middle East ahead of the weekend.
Gold may present a unique opportunity for certain investors with outlooks for a more dovish Fed in the future (think 2024-2025). Overall, during the Fed tightening cycle, the price of gold has held up rather well (better than many would have expected), even with many investors opting for interest-bearing fixed income.
The Takeaway
Picture a fulcrum or a seesaw. It feels like we are at or close to an inflection point in the markets, with one side having the prospects for a softer Fed sometime in 2024 and the other having presently elevated rates and inflation with a new weighty factor: the Middle East.
Earnings season is picking up steam this week, and we will get some fresh clues on the consumer Wednesday in the form of retail sales data for September. We’ll see if the month-over-month data can continue its recent estimate beats.
We will also pay close attention to what’s happening in the Israel-Hamas war, as our hearts continue to go out to those affected by the recent disturbing tragedies
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Overall, major U.S. stock indexes showed resilience amid a volatile week of trading. Hotter-than-expected labor market data catalyzed a positive market reaction late in the week.
Megacap tech (or tech companies with valuations over $200 billion) led this market reversal last Friday, helping the S&P 500 find its first weekly gain in the last five weeks.
Tallying the results, the S&P 500 rose by 0.48%, the Nasdaq 100 climbed by 1.75%, and the Dow Jones Industrial Average decreased by 0.30%.
Shockingly Strong Payrolls
Major U.S. stock indexes traded lower for most of last week, with market volatility on display. After the early week trading action, it was a waiting game heading into Friday’s September payroll data.
The Dow Jones estimates were for a paltry 170,000 in new jobs added. However, September saw 336,000 jobs added – way above consensus expectations.
Market Reaction
Friday was an attention-grabbing day in the U.S. financial markets, leaving many market veterans somewhat befuddled.
Recent conventional wisdom would dictate the reaction to the jobs number being something to the effect of: “Oh no! 336,000 jobs? The economy is running too hot. The Federal Reserve will have to hike rates further, so let’s sell stocks.” And initially (very briefly), that was the reaction.
Upon the data’s release on Friday at 8:30 a.m. (ahead of the cash stock market open at 9:30 a.m.), Emini S&P 500 futures markets turned sharply lower. But hold the phone (and this is the attention-grabbing part!), the S&P 500 started to turn upwards sharply as the morning wore on and the cash stock market opened.
Buyers continued shopping throughout the day, sending the S&P 500 sharply higher, in contrast to expectations.
But why? And does it matter?
If you ask veteran market participants, they will tell you there is no singular reason why Friday featured a reversal to the upside in the major U.S. stock indexes, but here are some factors that played into the day.
Overly-bearish sentiment: Sometimes, when investor pessimism reaches extremes, market reversals can occur. According to the CNN Fear & Greed Index, we can see that the index indicated extreme fear (below 25) last week and ultimately finished the week at 29.
Algorithms & AI: Unemotional AI and algorithms don’t care about fear – they never get scared! They often will find opportunities to take the other side of a trade that has been oversold or overbought; sometimes, they will accelerate on an “event,” like the jobs number last Friday, setting in motion a chain of events that sends indexes higher.
Under The Hood of the Payrolls Data: 336,000 jobs was a shocker to the upside. However, looking more deeply at the September payroll data, one could ascertain there could be a discrepancy between jobs added and employment.
Fed Market Expectations
As of last week’s market close, there is a high probability of the Fed leaving rates unchanged at the November meeting.
However, it is worth noting that the probability of a 25-basis-point hike sits at 27.1% as of last Friday’s market close versus an 18.3% chance a week prior.
Lower Prices at the Pump?
Notice lower gasoline prices lately? Lower crude oil prices may be trickling down to the pumps in the coming days.
After a hefty rise in crude oil for the summer and into September, prices started dropping precipitously last week in futures markets, with the front month November contract declining by 8.81% to settle near $82.79 for the week.
A potential economic slowdown and a significant build in gasoline inventories last week were cited as contributing factors to the price decline.
However, the Israel-Gaza conflict had crude oil trading higher in the futures markets on Sunday night.
The average price for regular unleaded gasoline was $3.722 as of October 7th versus $3.803 a month ago, according to data from AAA. On Monday morning, the average price was down to $3.704.
We will see if any impacts arise this week.
Narratives Change, Long-Term Investors Remain Steadfast
So, did we see a medium-term narrative shift in U.S. equities last week? What will the Fed do next? What about interest rates and inflation?
For clues this week, attention turns to Consumer Price Index (CPI) inflation data on Thursday. The most recent CPI report for August showed a 0.6% month-over-month increase, with higher energy prices contributing to much of the advance. Crude oil has declined thus far in October, but the upcoming CPI data is for September.
Moral of the story? It was a heck of a Friday last week. For long-term investors, we like to be in a position of strength and discipline by creating and adhering to a long-term plan for success versus reacting to short-term narrative shifts and outlooks.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
September lived up to its reputation as typically the worst month for U.S. equities of the year. With so much important activity, We thought it would be helpful to share an overview of monthly developments. Take a look below.
Major U.S. Stock Indexes
Major U.S. stock indexes declined in September, with rising bond yields and a looming government shutdown serving as catalysts. More on that in a minute.
For September, the mega-cap tech-heavy Nasdaq 100 led the bear parade, decreasing by 5.07%, the S&P 500 was lower by 4.87%, and the Dow Jones Industrial Average decreased by 3.87%.
Fed Pause Amid “Higher for Longer” Narrative
The Fed left rates unchanged at its September meeting. But bond yields (and interest rates) rose throughout the month. What gives?
Well, analyzing Fed actions and “Fedspeak” is a nuanced art. And it’s rarely about what just happened, but rather the probabilities of future policy down the line. The Fed left rates unchanged at the September meeting, but in the accompanying press release and commentary, indicated a “higher for longer” tone, with more rate hikes possibly on the table.
As of early October, the consensus is that there will be at least one more rate hike by the end of the year.
Federal Reserve Chair Jerome Powell said that policymakers would be holding policy at a restrictive level “until we’re confident that inflation is moving down sustainably toward our objectives.”
Translation? Don’t expect interest rates to decline anytime soon. The Fed has said it in so many different ways, yet many pundits want to predict that it is over. There may be more to go in the inflation battle and on the price stability restoration front.
Government Bond Yields (Treasury Yields) Rise
As noted above, yields rose amid the “higher for longer” Fed narrative, with prices dropping steadily. Remember, bond prices and yields move inversely to one another.
The benchmark 10-year note yield rose rather precipitously, settling near 4.574% for the month. This marked a 48-basis-point rise from the August monthly settlement near 4.094% (One basis point equals 0.01%). A large move indeed.
Bearish Sentiment Getting More Extreme
A potential government shutdown, higher interest rates, sticky inflation, and an inverted yield curve all contributed to bearishness (or fear-driven sentiment) among investors.
The CNN Fear and Greed Index, which measures investor sentiment on a scale of 1 (extreme fear) to 100 (extreme greed), currently sits at 28 to close out the month and quarter, indicating a substantial amount of fear in the market, albeit not “extreme fear.” The index saw a 2023 daily low reading of 23 at the peak of March’s regional banking turmoil.
For investors with certain risk tolerances, fear or extreme fear in markets can create long-term opportunities.
Jobs Growth
Nonfarm payrolls for August, released on September 1st, showed continued (too much?) strength. The jobs number came in above expectations again, showing 187,000 jobs created versus 170,000 expected.
The stronger-than-expected employment data left the data-dependent Fed’s pathway to higher interest rates open once again. The Fed wants to see job growth slowing, indicating a cooling economy and a relaxation in inflation.
Rising interest rates are intended to cool job demand, yet employers continue to add workers at a healthy pace. Though the Fed left rates unchanged in September, the strong jobs market could be a contributing factor to keeping interest rates elevated.
Inflation Obstination
Consumer Price Index: The last CPI release of the quarter, released on September 13, showed inflation ticking higher again in August after a cooling pattern for much of 2023. Data showed headline inflation (including food and energy) increasing by 3.7% year-over-year, a tick higher than the 3.6% estimate from Refinitiv economists and up from the 3.2% increase we saw in the July data.
On a monthly basis, headline consumer prices advanced 0.6%, the metric’s biggest monthly gain of 2023. Core inflation, which excludes volatile food and energy, rose by 0.3% month-over-month in August, higher than the 0.2% expectations.
Consumer inflation appeared to be slowing for most of this year, and the recent uptick has the attention of many.
Core Personal Consumption Expenditures: On the last day of the month and quarter, we did get some encouraging news on the inflation front courtesy of Core PCE.
The Core Personal Consumption Expenditures Index rose less than expected in September, increasing by 0.1% month-over-month versus 0.2% expected. Year-over-year, Core PCE increased by 3.9% as expected.
While the Core PCE metric shows some promise in the inflation fight and is the Fed’s preferred inflation gauge, it does not include the pesky food and energy pricing that we all deal with daily.
Energy Picture
Crude oil was on the rise last month, with the active futures contract (November futures) adding close to 9.44% to close at $90.79 for the month of September.
Should crude oil continue to rise, there should be some cooling effects on the economy, according to conventional wisdom anyway.
Government Shutdown Averted
In the proverbial eleventh hour, lawmakers avoided the October 1st government shutdown via a 45-day stop-gap funding bill.
This is potentially a good thing for equity market bulls, as fear was creeping into the market over the effects of a potential shutdown. The “kick the can down the road” deal was inked with just three hours left on the ticking clock.
Seasonality
September is a soft month for equities historically, and it sure lived up to its stereotype. However, the fourth quarter is also typically the best quarter for U.S. stocks.
Sometimes, it’s darkest before dawn. How dark will it get?
The Takeaway
While September was not a great month for U.S. equity investors, it also wasn’t as bad as many feared. The S&P 500 held above its 200-day moving average in September, a measurement that many market technicians use. Whether or not this level holds as support is yet to be seen.
Investors may be starting to realize that there will not be a magical unicorn Fed on the horizon, and let’s not forget that rates have been much higher than present in the not-too-distant past.
With that said, market narratives and investing environments are dynamic, and the present backdrop creates opportunities for certain investors.
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As expected, the Federal Reserve kept interest rates unchanged last week at its September meeting. The overall outlook shared, however, was one of higher rates for longer, with perhaps one or two more hikes this year.
In the short-term, U.S. stock market indexes didn’t show much love in response to the hawkish-sounding Fed, as the S&P 500 fell by 2.93%, the Nasdaq 100 traded lower by 3.30%, and the Dow Jones Industrial Average decreased by 1.89% for the week.
Pause with a “Clause”
At the September meeting, the Federal Reserve delivered a more sobering message than many had hoped for. Essentially, the message was that the Fed would keep rates unchanged this time (i.e., a pause), but that it ultimately predicts higher rates for longer (i.e., the “clause”).
The Fed also indicated that rates will likely remain “high” further into next year than it had previously anticipated.
In the Fed’s Summary of Economic Projections (SEP), division among voting members was apparent, with 12 out of 19 Fed officials favoring one more rate hikes this year.
Treasury Yields Rise
Leading up to and continuing after the conclusion of the Fed meeting, Treasury yields rose.
The benchmark 10-year note, used as a barometer for mortgage rates and many other products, rose by around 11 basis points last week; it closed the week near 4.439% after notching its highest level since 2007.
Two-year yields and other short-term duration Treasuries also rose last week, with the two-year note yield hitting a 17-year high near 5.197% last week; it settled near 5.114% for the week.
Yields at present levels may present viable opportunities for certain investors. And it’s not just Treasuries – municipal bonds and high-quality corporate bonds are also becoming attractive.
Government Shutdown Looms
The next government funding deadline of Oct. 1 is looming and will surely be in the headlines all this week. Lawmakers have differing opinions on funding and spending cuts.
It seems that the uncertainty of a potential shutdown started to be priced into financial markets last week, and we will see what this week brings.
Volatility Returns
Let’s face it – we have had a pretty smooth ride in the markets for 2023 so far, especially given the rising interest rate environment.
S&P 500 Volatility, as measured by the $VIX index, has been subdued for an extensive period, matching 2020 lows, even at the start of last week. That means investors were not expecting market volatility and were perhaps overly complacent given the headline risks and current environment.
Last week, however, S&P 500 Volatility ($VIX) woke up and rose around 24.57%, as the S&P 500 experienced its worst week since March.
Rising rates, a looming government shutdown, and a higher-for-longer Fed narrative were likely all partial contributors to the rising volatility.
A Reminder on Time
Time – it is one of the golden keys to investing. Speaking of time, we are approaching the end of the quarter and the end of the month. Is 2023 flying by, or what?
September is notably a soft seasonal time of year for U.S. equities. With only a week to go, we will see where the rubber meets the road as the markets digest the Fed, a looming government shutdown, and a “higher for longer” narrative.
The news headlines are getting more bearish – can that be a good thing? These types of news periods can be boons for many long-term investors with certain risk tolerances and investment objectives.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.
Overall, major U.S. stock indexes traded in mostly narrow trading ranges last week, digesting the inflation data while eagerly awaiting this week’s Fed rate decision and commentary.
Putting numbers to the week, the S&P 500 declined marginally by 0.16%, the Nasdaq 100 fell by 0.51%, and the Dow Jones Industrial Average rose very slightly by 0.12%.
Inflation Warming – The Latest
August Consumer Price Index (CPI) data showed inflation rising a tick more than expectations, with a 3.7% year-over-year increase versus the 3.6% expected. Breaking it down further:
Some analysts say that the higher inflation numbers for August are nothing to worry about. Others feel differently. Markets took the mixed yet higher inflation data in stride, mostly shrugging off the CPI data after its release.
Now, the market is holding its breath ahead of the Federal Reserve meeting this Wednesday.
Wednesday Is “FedDay”
Despite last week’s higher August inflation reading, probabilities have remained very high that the Fed will leave rates unchanged on Wednesday, according to the CME FedWatch Tool.
Any change in rates on Wednesday would be a shock to the market at this point. But it’s not the rate decision that many are looking at – it’s the Fed’s guidance and statement after the decision is released.
What is the Fed thinking about the November meeting? How do the recent inflation metrics affect their policy mindset? Will there be more rate hikes – wasn’t the Fed supposed to be almost done?
All of these questions are on the mind of the collective market right now. Inquiring minds want to know!
Treasury Yields Rise
Though markets have a 98% certainty (as of last Friday’s close) that the Fed will leave rates unchanged at this week’s meeting, Treasury yields rose last week.
Rising Treasury yields the week ahead of the Fed meeting may indicate the market’s expectations for the Fed to leave the door open for more hikes after this week’s September meeting.
Crude Oil & Gasoline March Higher
Gasoline reached 2023 highs last week, as rising crude oil prices translate to rising prices at the pump.
Crude for October delivery marched higher last week, adding close to 3.73% and closing last week near $90.77 per barrel.
Oil supply concerns are the focus, as U.S. Crude Oil in the Strategic Petroleum Reserve has declined sharply over the last year (by around 20%).
The Beat Goes On
Things won’t always be all about the Federal Reserve and inflation. But for now, the Fed meeting and subsequent commentary are front-and-center for the markets this week.
The recent mixed, yet higher inflation data is certainly a deviation from what we have seen over the last year. Perhaps a rise was to be expected, given interest rates have remained firm even as we’ve gotten more tame inflation prints over the last year or so.
Regardless, we will keep our eyes on the Fed this week, looking for any clues or direction on future policy.
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Links to third-party websites are for general information purposes only and do not constitute any offer or solicitation to buy or sell any services or products of any kind. The other parties are responsible for the content on their website(s). You are encouraged to read and evaluate the privacy and security policies on the specific site you are entering. They are not intended and should not be relied upon as investment, insurance, financial, tax, or legal advice.