September Lived Up to its Reputation

Historically, September and October are the two worst months for returns in the U.S. stock market.  No one knows why.  Perhaps investors are generally more ebullient during the summer months and bid stocks up while they are enjoying their summer vacations, then come back to their desks in a funk to the colder weather and shorter days of September.  Whatever the case, the S&P 500 Index is down 3.3% in the last three months after reaching its highest point of the year in late July.  The strongest period for equity markets, statistically, is the stretch from November to April, so investors who keep their nerve during September and October volatility are often rewarded with a bounce back.

September Fed Meeting Set a New Tone

The Federal Reserve decided to leave the Fed Funds rate unchanged at the conclusion of its September 19-20 meeting, keeping them at 5.25-5.5%, just as the investment community expected.  However, Chairman Jerome Powell’s press conference afterward seemed to cause investors to become a bit more fearful that the Fed is going to hold rates too high for too long to engineer a soft landing and will instead tip the economy into recession.  Chairman Powell, for his part, does not want to repeat the errors of the Federal Reserve in the 1970’s, which did not keep rates high enough for long enough to vanquish inflation.

Clouds on the Horizon for Consumer Spending

There is mounting evidence that consumers, who power two-thirds of the U.S. economy, are coming under strain.  There are three main reasons why consumers may be less willing to spend in the coming months than they were a few months ago.

First, oil and gasoline prices are higher.  The Saudis have engineered an OPEC production cut and are putting about 20% less oil into the market versus a year ago, thereby helping to push up prices by about 15% since the start of the year.  Dollars spent at the pump cannot be spent elsewhere.

Second, after three and a half years, the Covid-era pause in federal student loan payments is over.  As of September 1, interest is again accruing on student loans.  With the “student loan repayment” line item having disappeared from consumers’ income statements for the last three years, it is likely that its reappearance will cause a pullback in spending for the 45 million Americans who have federal student loan debt.

Third, even though the Fed did not raise short-term rates at its September meeting, long term rates have risen rapidly in recent months.  The yield on the benchmark 10-year Treasury note is now 4.7%, up from below 3.5% in May.  Higher long-term rates make it much more expensive for consumers to buy big-ticket items that often require financing, such and houses and cars.  Long-term rates are determined in the markets and are not under direct control of the Fed, but as they move higher and squeeze the economy, they are actually helping the Fed to fight inflation.

Another geopolitical risk that came out of left field just nine days ago was the horrific Hamas terrorist attack into southern Israel.  With a new war suddenly born in the Middle East, one might have expected a negative reaction in equity markets.  However, equities handled the new geopolitical risk in stride, and have actually moved higher since the war began.

As always, we are closely monitoring developments in the markets and in geopolitics and are available to talk.  Please contact us if there are any financial matters you would like to discuss.