August and September have been ugly for the market. In fact, since August 1st, the S&P 500 Index has lost 6.84% as of this writing (Oct. 4, 2023). It’s natural that clients start feeling a little nervous, especially since many were only just starting to feel confident about the market after a tough 2022. So, I wanted to take a few minutes and discuss what has driven the market in the last couple of months and what I think is in store for the rest of the year.
It may seem strange, but certain cycles and the time of year have a lot to do with how the market behaves. August and September have some of the lowest percentages of positive monthly returns for the S&P 500 for the year. The upside to that is that October, November, and December are some of the most successful months. October is referred to as the bear killer. If you can recall, last October marked the low for 2022, and the market has been in an upward trend since then.
Since August 1st, the 10-year Treasury rate (the 10-year Treasury influences mortgage rates and other borrowing costs, making it a very important benchmark) has climbed from 4.05% to 4.81%; that’s an increase of almost 20%. Believe it or not, that is a monumental increase in such a short amount of time. That has put a lot of pressure on the S&P 500, which has lost almost 7% in the same time frame. There are many reasons why this may be happening: Fitch’s recent downgrade of the U.S. credit rating, foreign countries selling U.S. treasuries to increase their liquidity due to slowing economies, the Federal Reserve pushing a higher interest rate for longer narrative, and a whole host of other reasons. The only thing we know for sure is when rates move up with that kind of velocity, it spooks the market.
At this point, Greece, Spain, and other European countries whose economies are not in as good a shape as the U.S. have 10-year bond rates lower than ours. To me, this is just one indication, among others, that our 10-year rate has risen too fast, too soon. When it’s cheaper to borrow money in Greece than in the U.S., I think there is a disconnect. This isn’t to say that we won’t see higher rates in the future, I just think that this most recent move upward is probably close to running its course for now. I anticipate the U.S. 10-year interest rate to move lower soon, which should be very positive for stocks.
In their last FOMC meeting, the Federal Reserve announced that they would not be increasing interest rates and would be data-dependent at each meeting to help them make decisions regarding the direction of the Fed Funds rate. They also released their Summary of Economic Projections (SEP) where they decreased their estimation of the number of interest rate cuts in 2024 and decreased their estimate of the unemployment rates for 2023 and 2024. I translate this as the Fed saying they do not anticipate a recession in 2024 without physically saying it.
Wall Street analysts have also been increasing their corporate earnings estimates for the companies they cover. This contrasts with last year when they were revising their estimates downward. It’s hard to make a case for a recession when companies are growing their earnings. Next year, the S&P 500 companies are expected to increase their corporate earnings by 11% or so. Increasing earnings are good for markets. As the 3rd quarter reporting period starts next week, I expect the market to become more optimistic.
Wrapping It Up
I don’t want to give you the impression that I think it’s all butterflies and rainbows; there’s certainly much to be concerned about: inflation is still too high (but heading in the right direction), there’s a war involving one of the biggest oil producers in the world, OPEC+ is trying to keep oil prices higher, the U.S. is running a huge budget deficit that’s only getting wider as interest rates stay elevated, higher rates are putting pressure on the banks, and don’t even get me started on the circus that is Washington D.C. However, there are always reasons to be worried about the market – there are always risks.
I believe the key is to look at the possible risks and measure them against the opportunities we see, along with all the other data available at the time, to make the best-informed decision we can. Sometimes the data causes us to be more cautious, and at other times it causes us to be more optimistic. When I look at the upcoming strong seasonality, the potential for interest rates to decrease over the next several weeks, and the strengthening corporate earnings estimates, I think we have enough cause to be optimistic for the end of the year for both stocks and bonds.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All investing involves risk including loss of principal. No strategy assures success or protects against loss.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that the strategies promoted will be successful.