Stocks continued to perform well in September, though there was a rotation in leadership from the trends seen thus far in 2019. Small and mid-cap stocks outperformed the large cap S&P 500 and value stocks outperformed growth. The leading domestic index was the S&P SmallCap 600 Value, positive by 5.72% during the month. The outperformance of value stocks over their growth counterparts, a rare sight in recent years, was propelled by the leadership of value-tilted sectors like energy, financials and utilities during the month. The cause for outperformance of small- and mid-cap stocks over large caps is less clear. The dollar strengthened somewhat significantly during September; while this has historically been a driver of small cap returns, that correlation has been muted for most of the past two years. More likely, the outperformance we’ve seen is a reversion towards the mean. Consider that the major small- and mid-cap indexes in the U.S. are still negative by 9.34% and 2.49%, respectively, over the trailing 12 months, despite their strong September, while the large cap S&P 500 is positive by 4.25% over the same time period. Fixed income asset classes had a difficult month, cooling off on the heels of what has been a banner year through August. The Bloomberg Barclays Aggregate Bond Index was negative by 0.53% during September but is still positive for the year by 8.52%. September’s headwinds for fixed income were due to a slight uptick in interest rates; the yield on the 10-year U.S. Treasury rose from a 3 year low of 1.44% on September 4^th to a still-low level of 1.68% by the end of the month.

The market was focused on many headlines last month, some expected and others complete surprises. Most expected was the Fed’s decision to cut its Federal Funds Rate level from 2.25% to 2.00%, announced on September 18^th. Markets are betting on at least one more cut before the end of the year, too. As Chair Powell and the rest of the FOMC debate the best path forward, President Trump has continued his attacks on Fed policy, among other things insisting that rates in the U.S. should be “zero or less.” When asked about the prospect of implementing negative interest rates in the U.S., Jerome Powell downplayed the idea.

Markets were not, however, expecting Iran to carry out a cruise missile strike on a Saudi Arabian oil field and processing facility. Nonetheless, that’s what happened on September 14^th, temporarily knocking 5.7 million barrels per day, 60% of Saudi output, out of the global oil supply. Despite the releasing of strategic reserves from countries like the U.S., the attack and subsequent production issues caused the biggest spike in oil prices in a long time, with the price of WTI crude jumping from $54.85 to $63.38 per barrel. This spike was the primary driver of return in the U.S. energy sector during September, and while the price has since fallen back to its recent range in the mid-$50 per barrel, there will likely be additional developments among global powers to address aggression from Iran and thereby creating new volatility for oil prices.

Another development in September, which may or may not be surprising depending on your political views, was the emergence of a fresh scandal involving the Trump administration and its relatively quick escalation to the House’s opening of an impeachment inquiry. The issue, whether Trump pressured Ukraine’s newly elected president to investigate Joe Biden and his son, will now be investigated over the coming months. The unfolding story has introduced some mild volatility into markets, but at this point it does not seem to be a major factor weighing on investors’ minds.

Economic data in recent months had been giving markets heartburn, stoking fears in particular about a slowdown in domestic manufacturing expanding into a broader recession in the near future. Those fears were somewhat alleviated in September, which was a relatively good month from an economic perspective. The Markit Manufacturing PMI outperformed expectations, coming in at 51 instead of the expected 50.3. Industrial production, consumer sentiment and general housing numbers also surprised on the upside. The main disappointing figure of the month was the addition of nonfarm payrolls, only 130,000 versus the expected 158,000.

Corporate earnings will soon be upon us, providing fresh and potentially market-moving data for investors. The expectations continue to be weak on a year-over-year basis, with the bulk of the drag on earnings in the S&P 500 attributable to companies with more global exposure. According to an early September report by FactSet, companies with 50% or more of revenues coming from outside the U.S. are expected to see a 10.7% decline in earnings, while those with a more domestic focus are expected to have slight growth of 0.4%. As the trade war with China continues, investors should expect this trend to endure.

The Brexit process continues to be a mess. Britain’s Supreme Court ruled that it was unlawful for Prime Minister Boris Johnson to suspend parliament, a piece of maneuvering that Johnson hoped would keep the October 31 deadline for Brexit in place, deal or not. The likeliest next steps are now that Britain will ask the EU for an extension of the October 31 deadline, which the EU is expected to grant. Most watchers assume that a new election will follow, which both Boris Johnson and the Labour Party leader Jeremy Corbyn have been calling for. It’s believed that the only way out of the current Brexit deadlock is a fresh election that would shift the power dynamics in parliament.

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