September 2023 Stock Market Commentary
Ethan Pollard | October 03 2023
Markets fell for a second consecutive month following a strong first half of the year, with both stock and bond prices selling off after the Fed re-affirmed its commitment to maintain a restrictive monetary policy at this month’s meeting.
The S&P 500, a benchmark for large cap US stocks, gave back -4.8% in September and is now up +13% year-to-date.
The more volatile Russell 2000, which measures the performance of smaller companies, fell -5.9% this month and is up just +2.5% in 2023.
Overseas equities lost -3.2% this month for a +5.3% year-to-date return on the MSCI ACWI ex-US index.
Within fixed income, ten-year treasury yields hit fresh post-2008 highs, approaching 4.7% at month-end, while the 20-year yield topped 5%. Bond prices move inversely to yields, so the Bloomberg US Aggregate Bond Index fell -2.5% in September, sending performance negative for the year (-1.2%).
Broad commodities pulled back despite higher energy prices, with the Bloomberg Commodity Index falling -0.7% for the month (-3.4% YTD).
Our data-driven Three Dials readings were unchanged during the month of September, which we outline below:
- Market Sentiment and Momentum: (Positive ➕)
Despite what has felt like a swift two-month selloff, the S&P has fallen only -8% from its July peak and is still up over +20% from its lows last year.
Having survived what has historically been the worst month of the year for stocks, we now head into the seasonally strong fourth quarter, and as such our Momentum Dial remains in a Positive position.
- Economic Fundamentals: (Negative ❌)
With inflation moderating, employment robust, and manufacturing improving, it is tempting to say that the Fed has completed its high wire act of cooling the economy without inducing a recession. However, the “long and variable lag” between monetary tightening and economic activity suggests that we may not have felt the full brunt of the current high rate environment, as demonstrated by pessimistic consumer confidence readings.
We’ve not yet seen enough improvement in the economic landscape to move our Fundamental Dial out of its current Negative position.
- Valuation: (Negative ❌ - Downgrade from Neutral)
Last month, our Valuation Dial tipped negative on a combination of falling earnings and rising interest rates. During the month of September, this quandary for equities only worsened as long-term rates continued to climb, which both hampers borrowing costs for companies while also dampening investor demand for stocks when less risky bonds offer more compelling yields. This unfavorable setup for equities continues to leave our Valuation Dial in a Negative position.
Our composite Three Dials reading remains in a Moderately Defensive position, with two dials Negative and one dial Positive.
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