Monthly summary – September
Rising rates and recession fears. The seasonal pattern of a weak late summer and early autumn came true once again, and equity markets sold off in September. In the absence of earnings reports and other major corporate news, investors focused solely on macroeconomic developments, especially in the US. Interest was centered on several issues: Fast rising bond yields, a hawkish pause from the Federal Reserve, a looming budget shutdown of the federal government, strikes and spiking oil prices.
Continued fears of recession
At its September meeting, the US central bank did not hike but conveyed a wait-and-see attitude towards future rate decisions, dependent on incoming data regarding inflation. Whilst not deviating from earlier statements, market participants interpreted this as a risk for a “higher for longer” environment which could ultimately lead to a recession instead of the much wished-for soft-landing scenario. Even though data showed falling inflation during the month, bond yields rose significantly reaching levels not seen since 2007. This implied continuing losses for bond investors who have now experienced a three-year stretch of negative returns, the worst in decades.
The US Congress passed stop gap bill
Having averted a budget ceiling shutdown as recently as early summer this year, the divisions in US politics between Democrats and Republicans and fractions within the Republican party once again became evident when they seemed unable to reach an agreement on a temporary spending bill before the new fiscal year starts on October 1st. However, at the very last hour, Congress passed a stop gap bill, thus averting a shutdown.
The ECB hiked rates
The European Central Bank once again hiked its short-term rates against a backdrop of diminishing demand, thereby heightening the risk of falling economic activity alongside inflation, i.e. stagflation.
Supply worries made oil prices rise
In September, the price of oil rose strongly, at one point exceeding USD 95 for Brent, marking an increase of more than 25 percent in three months. Output cuts by OPEC+ countries, not least Saudi Arabia, combined with still strong consumer demand led to worries of a medium-term supply deficit. This exacerbated fears that rising energy prices would increase inflation and negatively affect economic activity.
Troubles in China while India attracted investors attention
Developments in the Chinese economy continued to weigh down on investor sentiment, not least because of the problems in the real estate market. The founder of developer Evergrande, Hui Ka-yan, was put in house arrest following a near bankruptcy. Apart from the slump in construction, the slowing of overall economic growth also highlighted the country’s challenges with rising unemployment and deteriorating demographics. In contrast, India continued to attract investors as the sub-continent was increasingly seen as the new growth market and its stock market was one of few that noted an increase during the month.
World index down
The world index thus fell back for a second successive month in September. Except for energy, all sectors posted losses, with information technology at the bottom. The same went for the regions, and all major stock markets noted declines.
OUTLOOK
September was a disappointing month. Continued rising long-term interest rates and growing concerns about one or more additional hikes resulted in an increasing risk-off sentiment. On top of this, the US Congress’ difficulties to agree on a new budget created a feeling that the US economy was in danger of slipping into recession.
Long-term interest rates likely played the lead role
The continued rise in long-term interest rates was probably the most important single factor, but, as usual, risk factors interact with each other. The final weeks of the quarter were clearly negative and portfolio managers spent a lot of time towards the end of the month cleaning out the closet, and the stock market was characterized by risk-off.
Optimism was premature
The optimism we felt ahead of the month proved premature. It is clear that the market wants to see good reports and positive statements from companies about the future, as well as a US central bank that has stopped talking about further interest rate increases. We may be there soon, but October is likely to be characterized by anxiety and opposing views of the macro environment.
Large companies seem to continue to outperform small companies, and defensive companies with strong balance sheets should continue to be in demand. Of course, the situation should be the opposite when things become more clear, and the reporting season ought to provide some guidance as to when this may happen. A precondition for a comeback in the stock market is probably tied to long-term interest rates stop going higher.