Market Update: September 26, 2023

Economic data for the week included the Federal Reserve keeping interest rates unchanged but kept language relatively hawkish. Housing data was negative, with a drop in existing home sales as well as starts and homebuilder sentiment, although building permits improved. The index of leading economic indicators remained in a negative trend.

Global stocks fell back last week, due to the hawkish tone of central bank commentary, as opposed to actual rate hikes done, as well as idiosyncratic economic stresses. Bonds fell back, directly due to the rise in longer-term yields. Commodities were mixed, with crude oil prices little changed for the week.

U.S. stocks began decently, but fell back starting just after the FOMC meeting, as investors took Chair Powell’s comments regarding policy as ‘higher rates for longer.’ Naturally, this serves to pressure the economy, and notably earnings, further. The UAW strike has also intensified from only three plants to now nearly 40 around the nation, with uncertain duration and impact, in addition to a potentially upcoming government shutdown. Thursday’s decline, while not severe, was the largest in six months. As it stands, the S&P 500 is down -6% from its peak in late July (drawdowns can be stealthy, with September again proving its negative reputation).

Every sector declined in value last week, led by consumer discretionary down -6% (pulled down by Tesla and Amazon, together which represent 50% of the sector, among others), as well as more cyclical materials and financials. As expected, more defensive utilities, health care, and consumer staples held up better, with lesser but still-present declines. Real estate fell back over -5% with a significant move higher in interest rates, affecting financing conditions and required cap rates. Small cap stocks fared significantly worse than large cap, presumably more negatively affected by higher financing rates as well.

Foreign stocks fell to a similar degree as U.S. stocks, in both developed and emerging markets. Central bank hawkishness in the U.S. was absorbed overseas as well, where policymakers have been on a similar trajectory. Europe, however, is faced with a far weaker economic environment, which has been seen by continued weaker currency movements vs. the U.S. dollar. The Eurozone PMI remained in contraction last month, as one example.

The Bank of England kept key rates unchanged as well, at 5.25%, although unlike the common unanimous votes in the U.S., the decision there was a close 5-4 (the dissenters wanted a quarter-point hike). The U.K. and other central banks in Europe are generally faced with the same difficult challenge of still-too-high-inflation, but far slower economic growth than in the U.S. On the other hand, several emerging market central banks, notably in Brazil and Latin America, have seen inflation come back down and are easing into rate cut regimes before high rates inflict too much economic damage. China, of course, has been cutting rates slowly due to this economic weakness already having taken hold. Generally, we seem to be seeing a widening of the divergences between different central bank policies.

Bonds fell back across the board last week, due to the Federal Reserve’s message about ‘higher rates for longer’ being taken negatively for those hoping for swifter cuts in 2024. High yield fared worst, while investment-grade corporates and floating rate loans fared a bit better than U.S. Treasuries generally. With Treasuries, near-term yields (3-mo.) were unchanged, while the curve from 2 yrs. and beyond rose about 0.10%, reflecting the updated Fed expectations. Foreign bonds were held back a bit further by a stronger U.S. dollar during the week.

Commodities fell back for the week generally, with the headwind of a stronger dollar, with only precious metals up slightly. Crude oil was little changed last week, finishing at around $90/barrel, remaining elevated due to OPEC+ production cuts with an indefinite ending point.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.