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More than the leaves are changing – September Market Review
Just one look at a foliage map this time of year shows much of the country experiencing a change in seasons. Leaves changing colors, pumpkin spice lattes, and even some sweater weather are clear signs of change.
There is also a good amount of change happening in the economy and markets these days. While some may be fretting the shorter days and colder nights of autumn, we often see great opportunities present themselves as change occurs in markets. So, grab a pumpkin spice beverage of choice, put on a sweater and let’s prepare for the opportunities that may be presenting themselves for investors ahead.
Stock Market Performance: The bull rages on!
The broad S&P 500 Index posted a solid gain in September which is a bit of change as well. It was the first time since 2019 that the stock market was in positive territory for the month of September. For the year-to-date period through September, the S&P 500 has recorded its best nine-month start of the year since 1997. There have been over 40 days when the index has experienced all-time highs this year and that is the most all-time high recordings in one year since there were 70 record highs in 2021. Before then, you would have to go back to 1995 where 77 new all-time highs were recorded.
The continued upward trajectory of markets isn’t the only good news either. The third quarter not only kept the bull market going, but it did so with more broad based participation across markets. We saw recent leadership rotate from Technology and growth stocks toward a wider range of asset classes. Specifically, cyclical investments outperformed the broad market in the quarter and U.S. small- and mid-cap stocks also had a very strong quarter, gaining nearly double digits over the last three months.
We are very pleased to see breadth-to-market gains, once again proving the benefit of investing in long-term diversified portfolios. While there were some fluctuations across certain sectors, the overall market showed its resilience for investors. We also have another win for diversification.
Fixed income Markets: Interest rate cuts have begun
We have discussed the upcoming changes in interest rate policy for some time, and it finally happened. On September 18th the Federal Reserve announced its first interest cut since 2020, reducing short-term rates by ½ of a percent, while signaling more cuts to come later this year and into next. The Fed justified lower lending rates as it gained greater confidence that inflation was well managed. The Federal Reserve is expected to be more concerned with employment metrics from now on, given their confidence in inflation remaining subdued.
We have discussed the upcoming changes in interest rate policy for some time, and it finally happened. On September 18th the Federal Reserve announced its first interest cut since 2020, reducing short-term rates by ½ of a percent, while signaling more cuts to come later this year and into next. The Fed justified lower lending rates as it gained greater confidence that inflation was well managed. The Federal Reserve is expected to be more concerned with employment metrics from now on, given their confidence in inflation remaining subdued.
Now that the Federal Reserve has begun rate cuts, we will continue to watch closely to understand the impact to the broader economy. It is not expected to have major market impacts right away. Just as foliage does not occur overnight allowing leaf-peepers some time to plan their fall outings, we too should have some time before seeing the final impact of lower rates on the economy.
We are already researching the potential impacts and opportunities of the change in interest rate policy. Brian Reynolds of Reynolds Strategy shared the attached charts on mortgage re-financing. We mentioned that longer-term interest rates have been falling for a few months now and in a recent note, Reynolds goes on to say that the lower rates are “…pulling mortgage rates down with them. Those lower mortgage yields are beginning to make it attractive for homeowners to refinance” He goes on to suggest “the jump in refinancing is stronger than generally thought and the mortgage market is on the cusp of a massive surge in refinancing.”
We still believe it is a bit too early for any conclusions from this data. However, it is a good indication of the work that is done when considering opportunities to invest. Work that we are always doing for the benefit of Stevens Capital clients.
Looking Ahead: Patiently waiting for opportunity
As mentioned, it is likely too early for us to know the full impact of recent changes to interest rate policy, but it is a great time for us to sharpen our pencils and get to work assessing what risk and opportunity may result from different scenarios that may impact markets this Autumn and beyond.
Of course, it is not only interest rates that are going to impact markets going forward. The start of autumn also brought new challenges home and abroad. At home, we must assess the potential impacts of complex developments such as ongoing labor disputes at many East and Gulf Coast ports as well as the potential impacts of natural disasters such as Hurricane Helene. Looking abroad, we have seen an increase in geopolitical tensions globally, which impact global risk sentiment. China too can impact global risk appetite just introduced billions in liquidity for the stock market and plans to slash interest rates and payments for home loans in hopes of kick-starting growth in the world's second-largest economy.
History can often be a guide but should not be leaned on to heavily by investors. Coming into September there was a lot of talk about how bad seasonal performance was in September. As we just experienced a positive monthly return, it is clear that seasonal effect did not impact September performance this year. We mention this because October has a troubling history for markets. It is known as a time of extreme volatility, with some of the more notable Wall Street drawdowns occurring over the month. However, that is not a reason to change investment strategies. Rather than adjusting to any potential short-term movements or seasonal patterns, it is vital to always be open to near-term risk and opportunities, but to do so within a long-term framework.
Tony DeSpirito, an often quoted CIO presents the benefits of a long-term thought process very well in a recent note where he highlights, “Since 1974, the stock market has endured a presidential resignation, the collapse of the “Nifty Fifty” blue-chip stocks, raging stagflation, the 1987 stock market crash, the rise and bursting of the dot-com bubble, three wars in the Middle East, the GFC and COVID-19 pandemic. And over those 50 years, $5,000 invested in the S&P 500 Index would have grown to be worth $1.3 million today.
"Volatility is inevitable. Still, for long-term investors, patience is a virtue.”
