CWG Investment Committee: A Typical Wet September Leads to Fall Foliage!

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A continued interest rate rally was the big story in September, pushing stock indexes into the red for the second consecutive month. The S&P 500 was down 4.8%, the Nasdaq fell 5.8%, and the Dow retreated 3.4% during September. The Dow is now negative year to date.

While interest rates were the main culprit, negative seasonality effects of August and September cannot be ignored. According to Bloomberg data, the duo are the worst performing months on average since 1970. In fact, September is the lone month with a negative average monthly return in that period.

The current two-month skid in equity prices resulted in the S&P 500 declining 3.3% in Q3. This broke the streak of three straight quarters of gains, including 8.7% in Q1 and 7.5% in Q2.

While October through December is often a good stretch for market gains, don't be surprised if we continue to experience more downward pressure on stocks.

Perhaps the bond market is finally waking up to the fact that the 40-year bull market in bonds is well and truly over.

Interest rates are going up as expressed by 2-year US Treasury notes currently yielding 5.11%. The 10-year Treasury hit 4.80%, drastically climbing from 3.68% in July to the highest level since 2007. The 30-year Treasury bond rates surged the most in a quarter since 2009. Today that yield hit 5%.

We continue to take advantage of the inverted yield curve, using short-term Treasury Bills now yielding more than 5.5%. We find it a great place to park assets for those with conservative portfolios.

Consumer rates marched higher as the bond prices swooned. Rates on 30-year mortgages are now 7.5%, up from 2.5% in 2020. Housing prices are finally stalling as inflation is falling. Would-be home buyers lament as some areas have seen prices jump over 100% in the past three years!

Wall Street continues to be wary of the stronger-than-expected U.S. consumer that has been “revenge spending" on experiences. The trend showed that Beyonce and Taylor Swift concert tours made material impacts on traditional economic data. Plus, trips to Europe seem to be peaking as the Covid lockdown demand is finally sated.

As we enter Q4, there are plenty of negative catalysts available for the market to digest.

S&P 500 earnings are expected to remain steady, estimated at $220 for the year, down around 5%.

Food, energy, and housing costs are stretching consumer pocketbooks even as unemployment remains low at 3.8%.

Oil prices have rallied past $90 per barrel. Europe appears to be in recession. China has failed to find it's groove as it increases its distaste for U.S. policies on banning certain technology.

All those concerns will take a backseat to the next Fed meeting at the beginning of November and the economic data released leading up to it. Fear is rising amongst investors that inflation may stop trending downwards, giving the Fed reason to raise rates again and maintain rates “higher for longer”.

While Fed monetary policy remains top-of-mind, Washington’s ugly politics and poor fiscal policies are starting to stir the bond market. It may get worse before it gets better.

The U.S. deficit is now $33 trillion, far surpassing 2022 GDP of $26 trillion. Spending by the government at the current rate will generate nearly a $2 trillion deficit this fiscal year, and we aren't even in an economic downturn.

According to the CBO, tax revenues are down 10% and spending is up 10% for 2023. 

Funding the deficit will require massive treasury sales in the coming years.

Overall, the current pullback in the stock market reflects the expectation of higher rates, which implies lower equity values.

In our opinion, a significant downside appears unlikely. The economy is still strong with Q3 GDP growth projected at 4.9%, according to the Fed’s GDPNow tool. This is a far cry from the recession that the market was anticipating at the beginning of this year.

It looks to be an interesting period into year end.

Have a wonderful fall and Happy Halloween!