by Jason Norris, CFA
Principal Equity Research and Portfolio Management
As the seasons change and we move into fall, the focus shifts from summer vacation to back to school and football. And just like the calendar, the markets stay true to history. The S&P 500 is down over 3% this month, led by technology stocks which are down 7%. While there is some angst, these declines are normal. When looking at historical monthly performance, September routinely stands out as the worst performing month. The chart below shows S&P 500 median monthly returns since 1960, note how the only negative month is September.
Looking back, the “sell in May” adage has some merit, at least on a relative basis. History says we should see healthy gains in the fourth quarter, however, this year we still have a lot of uncertainty in the economy.
Waiting in the Wings
Earlier this week, the Fed left its benchmark rate steady at 5.25-5.50%, however, they did signal that cuts next year are less likely. It looks like they are of the view that a “soft landing” will be engineered, and growth expectations have increased. While we have thought that if there were a recession it would be short and mild, we still believe there is a risk to economic growth over the next year. It takes time for the full impact of higher interest rates to be felt by the economy; to put this into perspective, we are just a year into the start of the Fed raising rates. The 10-year treasury is hitting levels (4.4%) we haven’t seen in over 15 years. It seems inevitable that consumer spending will be more constrained - excess savings that were built up from government stimulus payments have been virtually exhausted.
Contrary to lower spending rates, the U.S. economy is operating at full employment. And more importantly, wage gains remain healthy and are now above the inflation rate. The chart below compares inflation (measured by the Consumer Price Index, CPI) with wage growth (average hourly earnings). The high inflation of the last few years resulted in a drain of savings, however, at current levels, consumers have the ability earn at a higher rate than the rate at which costs are growing. This should continue to be supportive for the economy.
We will know in 2024 if the Federal Reserve succeeds with a soft landing, or as history has shown, tightened too aggressively and the economy falls into a recession. While our view continues to tilt toward a soft landing, or a very mild recession, there are a lot of headwinds to be felt over the next few months.
Takeaways for the Week
Interest rates will remain higher, longer as growth expectations have improved
Stocks sold off this week as the Fed signaled less cuts next year