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.
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.
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.
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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