Football season is in full swing. Some preseason hopes have already been crushed, and hard hits have been delivered. Investors took some hits in September, as the third quarter ended with a thud. Every major asset class was down for the month, but the S&P 500 Index was the best-performing, down 0.35% for the month.
Inflation, Fuel Prices, and Interest Rates Pressure Markets
Inflation and interest rates continue to put pressure on markets. Oil prices moderated throughout the month, but the cost of fuel, both diesel and unleaded, increased. The price increases have investors on edge regarding the impact on future inflation. These concerns were apparent in the bond market. Longer-term interest rates climbed higher throughout the month, and the Federal Reserve increased the short-term rate for the first time in years.
Technology and Communications Offset Broader S&P 500 Weakness
It is not often that nine out of eleven sectors of the S&P 500 are down by an average of 4.78% while the index itself is down less than 1%. But the outsized weighting and impact of the Technology and Communications sectors, up 4.47% and 4.33%, respectively, helped to offset the other nine sectors.
The Technology sector continues to shine this year, posting a gain of 28.38% for the year, second only to the Energy sector. The semiconductor companies continue to be beneficiaries of spending. Nvidia, Broadcom, Micron, AMD, SanDisk, and more continue to see massive increases in free cash flow, propelling the sector higher.
That cash flow comes from somewhere, and increasingly, it is coming from borrowing. Large companies like Google, Amazon, Meta, and Microsoft have all had negative free cash flow in recent reporting periods. Borrowing while rates are rising may affect earnings growth in the future if AI doesn’t deliver the anticipated revenue boost. A slowdown in spending from these companies could hit the semiconductor companies quickly.
Mid-Cap and Small-Cap Stock Performance
Mid-sized and smaller companies fared worse than the large-cap stocks. The S&P MidCap 400 was down 4.22%, while the S&P SmallCap 600 dropped 5.57% in the month. Both were victims of higher rates and investor anxiety. The SmallCap Index has continued to outperform the S&P 500 so far year-to-date, but the lead has been notably reduced.
It is typically difficult for the smaller companies to perform well when interest rates are rising. Financials, Industrials, Health Care, and Real Estate make up 53% of the index. These sectors tend to be more interest-rate-sensitive than Technology, the largest portion of the S&P 500.
International Stock Markets Face Rate and Inflation Pressure
Foreign stocks were also hit for a loss. The S&P Developed Broad Market Index (BMI) suffered a 2.91% decline, while the S&P Emerging BMI fell 2.15%. Taiwan and South Korea continue to lead foreign equity markets due to semiconductor companies Taiwan Semiconductor, SK hynix, and Samsung.
Rates and inflation are a global issue, not just in the U.S. This is adding pressure to stock markets from Asia to Europe.
Bond Market and Federal Reserve Rate Hike
Bonds got sacked for a loss during the month. The S&P U.S. Aggregate Bond Index was down 2.27%. The Fed’s rate hike was widely expected by the time it was announced. This change in direction had been building since the war with Iran started.
The Fed historically doesn’t hike one time. It is usually a series of hikes. Investors are now looking for clues as to how many more hikes may be coming. The Fed’s own projections showed two more rate increases this cycle.
Precious Metals Decline in September
Precious metals suffered the largest decline for the month, with a 6.60% decline in the S&P GSCI Precious Metals Index. It has been a volatile and difficult year for metals. Higher rates, strength in the dollar tied to oil purchases, and portfolio rebalancing after a massive run-up in the past three years have pushed metals down each time they start to trend toward positive returns for the year.
Looking Ahead to the Fourth Quarter
Entire football seasons can swing on one play, one drive, or one quarter. For investors, September was a rough end to the third quarter, but they are still winning year-to-date, with one more quarter to go.
Investment Commentary by Jason Flores, CFA, CAIA – Executive Vice President & Chief Investment Officer at Central Trust Company.
At Central Trust Company, we continue to reassess the rapidly changing investment landscape for both risks and opportunities. If you would like to access our full monthly outlook and additional investment commentary, visit our Investments Learning Center. As always, if you have questions or concerns, please contact your Central Trust Company team. We are always ready to help.
