September ended up being a challenging month for the markets as the S&P 500 was down by 4.77%, its largest monthly loss of the year. This was also the second month in a row that the S&P 500 finished in the negative, finishing the quarter down 3.3%. Value and growth both were down in a similar fashion for September as each were in the negative by over 4.5%. Small Caps have struggled to keep pace with Large Caps this year as the S&P 600 was down 6% for the month of September, 4.9% for the quarter and is just slightly positive year-to-date at 0.8%. The Nasdaq composite also struggled in September and was negative 5.8% but its year-to-date performance remains strong at 27.1%. When looking at international stocks, they outperformed domestic equities in September but trailed for the quarter. The MSCI EAFE lost 3.37% in September and 4.05% for the quarter while the MSCI Emerging Market Index lost 2.57% in September and 2.79% for the quarter. The Bloomberg US Aggregate Bond Index lost 2.54% in September, its worst monthly return since February, and the index lost 3.23% for the quarter, its worst quarterly return since the 3rd quarter of 2022. 

From a sector standpoint, Energy was the only positive S&P sector for the month, up 2.6%. Real Estate and Technology were the worst performers in September. Real Estate lost 7.3% while technology was down 6.9%. For the quarter, there were only 2 positive sectors, Energy, which was up 12.2% and Communication Services up 3.1%. The laggards were utilities losing 9.3% and real estate losing 8.9%. Year-to-date, Communication Services continues to be the sector leader, returning 40.4% followed by Technology at 34.7%. Utilities, Real Estate, Consumer Staples, Health Care, and Financials are all negative year-to-date. The S&P 500 equal weight index is now only positive by 1.65% year-to-date compared to the S&P 500, which is up 13.1% year-to-date. 

When looking for the reason for the harsh downturn in the markets you don’t have to look too hard before landing on surging interest rates, especially at the long end of the yield curve. The 10-year treasury spiked during September moving from 4.09% to 4.57%. This is the highest 10-year treasury rate since September of 2007. One of the causes of this spike is the ongoing Federal Reserve hiking cycle which began in March of 2022. The Fed has also indicated that they intend to leave rates higher for longer than previously expected. Other factors that could be contributing to surging rates are the US credit downgrade, the budget deficit and ballooning national debt, and the easing of Japanese yield curve controls.  

A higher Fed Funds rate and higher treasury rates have also led to a spike in the 30-year mortgage rate. According to bankrate.com, the average rate on a 30-year mortgage reached 7.83%, the highest average mortgage rate since the year 2000. This led to a sharp drop in existing home sales, down 7.12% in August, which was reported in September. It will be interesting to see where home sales in September come in at with even higher rates this month. 

The Writers Guild Strike came to an end on September 27th after a 148-day work stoppage in Hollywood. However, the United Auto Workers (UAW) chose to go on strike at targeted factories in September and by the end of the month over 25,000 auto workers were on strike. The UAW strike could have far-reaching economic impacts including a detrimental effect on GDP if the strike goes on for an extended period or spreads to more UAW factories. On the other hand, the strike could also push inflation higher if the auto companies fully meet the union’s demands of a 40% pay increase, a 4-day work week, and a return to employer funded pension plans. The UAW and the Writers Guild strikes have received the most headlines but according to the U.S. Bureau of Labor Statistics there have been work stoppages involving over 300,000 workers so far this year as unions look for pay increases to offset the rising cost of living. However, the higher cost of labor has been one of the drivers of inflation over the past two years. 

The Fed’s fight against inflation continues as many expect higher rates to stick around for longer than previously expected. Inflation has come down from its highs, yet we still have not reached the Fed’s target inflation rate of 2%. Higher rates have worked their way into many different aspects of the economy. From the cost of labor to rising gas prices there are still multiple factors pushing inflation higher while higher interest rates continue to work to push it down. While they do not have a perfect tool, the Federal Reserve remains committed to using higher rates to get inflation down to their 2% target, but the question remains, how much economic damage will be acceptable to complete the mission? 

Either way, it is important to create a financial plan and investment portfolio that is unique to your circumstances, goals, and risk tolerance and is meant to weather both bull and bear markets. 

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