September Market Review and October Market Outlook

Last Month in the Markets: September 1^st – 29^th, 2023

What happened in September?  

It was a difficult month for investors, as major indices globally lost value, as did gold. Industrial Metals, Oil and U.S. treasury yield were the only parts of the market that saw increases. The narrative for interest rates being kept “higher for longer” dominated market sentiment as the Fed signaled an intention to remain restrictive for longer and the US treasury ramped up debt issuance over the month. This was partially fueled by the inflation pressure from a continued oil price surge, which showed the WTI price climb to its highest level since July 2022.  A deeper negative effect was seen on growth-oriented parts of the market, such as the technology heavy NASDAQ, which is relatively overweighted to companies whose valuations are based more on future earnings potential.

Internationally, the UK 100 index, with it’s overweight in energy and defensive names, managed to partially insulate from the global sell off, ending down less than 1%. Asian indices lost comparable value to North American markets, with the continued lack of a meaningful Chinese economic recovery.  However, despite the usual high positive correlation between China and industrial metals, they managed to end the month flat. Bloomberg Industrial Metals Index

Gold, which usually has a negative correlation to interest rates, also lost value, while the US dollar, which is seen as a safe haven in times of market stress, appreciated against most major global currencies. This was also fueled by the relative resilience of the US economy and continued rise in US interest rates.

Several notable developments happened in September:

September 1^st

The month began with the release of a strong U.S. employment report that showed 187,000 nonfarm payroll jobs had been added in August, and the unemployment rate rose to 3.8%.  Employment trended upward in health care, leisure and hospitality, social assistance, and construction, and declined in transportation and warehousing.  BLS release  

September 13^th

U.S. CPI rose 0.6% in August, after rising only 0.2% in July.  “Over the last 12 months, the all-items index increased 3.7 percent before seasonal adjustment” according to the Bureau of Labor Statistics.  Core inflation, which excludes food and energy, rose more than expected at 0.3% for the month.   CNBC and August inflation  BLS release   CNN and August inflation

September 14^th

The European Central Bank (ECB) increased its three key lending rates by 25 basis points.  North American AND European equity indexes jumped-up on the news, and the Europeans leapt higher on a percentage basis (screen shot) ECB announcement

September 15^th

The United Auto Workers (UAW) began a strike against the Big 3 U.S. car manufacturers for the first time walking out at all of them simultaneously.  At the end of the month the UAW expanded its strike action further as the rhetoric from both sides continued.  APNews and UAW strike

September 20^th

At the latest monetary policy announcement from the Federal Reserve, Chair Powell stated, “recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low.  Inflation remains elevated.”  Consequently, the federal funds rate was maintained at a range of 5.25% to 5.5%.     Federal Reserve announcement and press conference

September 29^th 

Released on Friday was the U.S. Federal Reserve’s primary inflation indicator, Personal Consumption and Expenditures Price Index.  In August prices rose by 0.4% (down from 0.9% in June) in aggregate, excluding more volatile food and energy saw the index rise by 0.1%.  This was the smallest monthly increase since November. The core PCE level is down from 4.3% in July and is at its lowest level in nearly two years.  These levels were slightly below expectations, and the year-over-year annual increase for core PCE was 3.9%, which matched the forecasts.  

The continuing improvements in the battle against inflation suggests that the Federal Reserve is nearing the end of its rate increases.  The next interest rate announcement is scheduled for November 1^st.       BEA’s PCE release   CNBC and PCE

September 30^th

Markets continued to suffer from uncertainty whether a government spending bill would be successfully negotiated in the U.S. Congress.  For the third week out of the last four, equities broadly lost ground.  The trading-week had ended before a deal was reached in the House of Representatives on Saturday evening.  It is a stop-gap measure, that extends spending for an additional 45 days after it is expedited and approved in the Senate and signed by President Biden just prior to Sunday’s 12:01 am deadline.  CNBC and “shutdown”  CNN and “shutdown”

What’s ahead for October and beyond in 2023?

After avoiding a U.S. government shutdown, the next important event will be the Federal Reserve’s interest rate announcement on November 1^st, and likely the repeat of the threat of a government shutdown in mid-November unless another short-term stop-gap or longer-term funding bill is passed. 

As we see central banks continue to try to strangle the economy with tight monetary policy, to bring inflation down to target, consumers continue spending and the labour market remains tight, so North American economies remains resilient. Meanwhile, as the market remained optimistic over the summer, we have recently seen a shift in these expectations, while fundamentals haven’t changed. As interest rates continue to increase, company earnings that an investor seeks to capture by purchasing a stock, over and above the rates you can obtain through taking less risk, becomes less appealing and are at a low compared to the last few decades. Additionally, chances of a recession continue as tight monetary policy works its way through the economy. Morgan Stanley   

As we move forward, the market narrative should increasingly focus on the impact of tight monetary policy and less on how much rates will increase. Regardless of when this happens, the full impact has yet to be seen and is still only speculated about. Until we see this playout, defensive, yield bearing assets remain our recommended overweight.

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