Hello all - we hope you had a nice September.
Last month we mentioned that September is historically the worst month for stocks – and it lived up to that reputation. With the worst returns of the year, the Dow fell 3.5%, the S&P 500 lost 4.9%, and the Nasdaq, which has a higher concentration of tech stocks, was lower by 5.8%.
While there was a lot of bad news this month, there are reasons to be optimistic and we’ll get into them later.
Last month we mentioned that September is historically the worst month for stocks – and it lived up to that reputation. With the worst returns of the year, the Dow fell 3.5%, the S&P 500 lost 4.9%, and the Nasdaq, which has a higher concentration of tech stocks, was lower by 5.8%.
While there was a lot of bad news this month, there are reasons to be optimistic and we’ll get into them later.
Here’s a look at how the markets moved this month:
Here’s a look at how the various sectors performed this month:
The stock market remains solidly in positive territory for the year, with the S&P 500 up 13%. However, that performance came from just a handful of names. The top seven stocks had significant gains, while the remaining 493 are barely flat on the year.
The chart below shows how large this divergence is.
The chart below shows how large this divergence is.
Bonds were again a big story this month. Bond yields hit their highest level since 2007 (as measured by the 10-year bond), which means the cost to borrow money is extremely high.
When bond yields rise, bond prices fall. For investors in bond index products, like bond ETF’s, that means the ETF price moved lower. Here’s a look at the price the most popular bond ETF, the Vanguard Total Bond Index:
Oil has been a big story, too, as prices hit their highest level in over a year. Oil prices have risen as our stockpiles have fallen to a 14-month low and OPEC unwilling to pump more. Lack of supply and rising demand means higher prices.
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INFLATION
These higher oil and energy prices have had a significant impact on inflation. Here’s a look at how gas prices have risen over the past three years, up about 50% over that time:
Overall inflation rose again last month. The year-over-year numbers had been moving lower for over a year, but took a turn higher for the second-straight month.
When you look at inflation month-by-month, inflation is still rising every month.
Inflation is also steadily rising when we exclude food and energy from the calculation (which economists call the “core” measurement).
Inflation at the business level looks to be turning the corner and is coming down, which is a good sign for us as shoppers.
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THE FED
Talking about inflation inevitably brings us to the Fed, who held another policy meeting this month. They have been raising interest rates to slow inflation by slowing the economy.
To us this makes no sense, because inflation is coming from things like higher energy prices, which the Fed can’t control. Or supply chain issues, which the Fed can’t control. Or businesses having to pay higher wages, which the Fed can’t control. Or higher regulatory and insurance costs, which the Fed can’t control. Or countless other factors the Fed can’t control. We think squashing an entire economy is idiotic, but we think most of what the Fed does is idiotic.
At any rate, the Fed announced no new changes to their policy at their meeting this month. However, many investors thought the Fed would lighten up on their policy in the coming months, but they seemed to do just the opposite. They indicated they were likely to raise interest rates even further and keep these rates high for longer than many expected. Stocks sold off on the news.
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ECONOMIC DATA
Economic data wasn’t bad this month.
A lot of investors and policy makers have been using the phrase “soft landing” to indicate that the economy isn’t heading to a recession. This is funny because Bloomberg has found that increasing talk of a “soft landing” has always preceded a recession.
Another recession indicator is the leading economic indicators. This index combines many other indicators that tend to signal the direction of the economy (like weekly unemployment numbers, building permits, etc.).
This index has been lower for 17-straight months now. It has never gone this low without a recession following.
This index has been lower for 17-straight months now. It has never gone this low without a recession following.
The strength of the manufacturing sector improved this month, but it continues to contract – it’s just not contracting as fast.
This marks the eighth month of a contracting manufacturing sector. As we can see in the chart below, manufacturing tends to decline during global economic crises, so this yet another recession indicator.
On the positive side, the service sector of our economy looks to be doing alright.
Continuing with the positives, retail sales were higher:
Coming off the biggest drop in three years, durable goods (these are items with a longer life, like a phone or refrigerator) posted a slight gain.
The economic surveys leaned negative this month. Consumer confidence moved lower:
Small business optimism also moved lower:
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Where does the market go from here?
At the beginning of this commentary we mentioned there were reasons to be optimistic. We think now looks like a good time to buy. Stocks are very oversold (cheap) in the short term (a few weeks), and the odds of a rise are greater than a decline.
We are also entering a historically strong part of the year. Yes, October can be a volatile month, but it starts a quarter that is usually very strong.
Further, the last three September’s have all fared poorly.
2020: -3.9%
2021: -4.8%
2022: -9.3%
But the fourth quarters of the last three years have been very strong.
2020: +11.7%
2021: +10.7%
2022: +7.1%
We don’t like to make investment decisions based on historical precedents, but when combining all the other factors, we think now is a good time to dip a toe in. We would like to see some stability before buying, though. A day or two in the green with solid buying volume is important – its not wise to try to catch a falling knife.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
2020: -3.9%
2021: -4.8%
2022: -9.3%
But the fourth quarters of the last three years have been very strong.
2020: +11.7%
2021: +10.7%
2022: +7.1%
We don’t like to make investment decisions based on historical precedents, but when combining all the other factors, we think now is a good time to dip a toe in. We would like to see some stability before buying, though. A day or two in the green with solid buying volume is important – its not wise to try to catch a falling knife.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
