Market Monitor: September Update
Headlines and Highlights
- September sell-off cements markets’ worst nine-month start in 20 years: U.S. and global stocks sank sharply last month, pressured by central banks’ intensive policy-tightening to reduce inflation. The Standard & Poor’s 500 index had its worst month (-9.2%) since March 2020, sealing its biggest decline in the first nine months of a calendar year (-23.9%) since 2002. Bond prices also fell as yields rose to match interest-rate expectations; the 10-year Treasury yield briefly topped 4% for the first time in 12 years.
- Fed pushes interest rate to 3%, eyes 4%: The Federal Reserve lifted the target for the benchmark federal funds rate – anchored at zero as recently as March – to a range of 3% to 3.25% as it focuses on stamping out high inflation. Fed officials forecast that rates could reach 4.4% by the end of this year and 4.6% in 2023, steepening their prior estimates. Vice Chair Lael Brainard said the central bank is monitoring financial-market turbulence but remains focused on its inflation fight until its goals are achieved.
- Consumer confidence highest since April: U.S. consumers continued to show surprising resilience last month in the face of this year’s inflation and other challenges, buoyed by lower gas prices and a strong job market. The Conference Board’s index of consumer confidence rose to its highest level in five months with a second consecutive increase. A separate measure reflecting consumers’ six-month outlook was the highest since February.
Selected Market Returns
Sources: Morningstar, Altair Advisers
- The Federal Reserve looks set to raise the federal funds rate by another three-quarters of a percentage point at its next meeting in early November. We see little chance of the Fed pausing its rate increases by year-end, based on recent comments of Chair Jerome Powell and other Fed officials recommitting to their tightening trajectory. The rate hikes should ease in the first half of 2023.
- We expect to see a bigger deceleration in inflation in upcoming months as the Fed’s rapid-fire series of rate hikes hits consumers and businesses harder. The latest Commerce Department data shows spending on durable goods falling and ocean freight orders are down, signaling a drop in consumer demand.
- Real estate investment trusts have fallen disproportionately in the latest sell-off as the Fed signaled no let-up in its interest-rate increases, but we retain our conviction in this investment class. More turbulence could lie ahead before a recovery; however, valuations already are historically low and REITs have generated high returns in the year following past rate hikes.
- Chances of a U.S. recession have risen as the Fed keeps tightening, reducing the likelihood of a soft landing for the economy, although we still do not expect a deep or protracted slump. The Atlanta Fed estimates that the economy grew by 2.3% in the third quarter and analysts surveyed by FactSet still forecast positive corporate earnings in the third (2.9%) and fourth (4.0%) quarters. Earnings estimates have come down significantly, however, and we will be monitoring reports closely this month for changes in companies’ outlooks.
- The U.S. dollar’s latest surge against other currencies, tied closely to the Fed’s interest-rate hikes, has increased pressure on the global economy. However, the world economy is still on track for modest growth both this year and next. The 17% rise in the dollar index this year is unsustainable.
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