Global Markets Retreat in September

Stock markets in the U.S. and around the world declined in September, as the smaller-cap and tech names were hit hard. Unfortunately, September’s rough performance was very similar to August’s dismal performance.

Further, the performance difference between the blue-chip, mega-cap names of the 30-stock DJIA versus the large-cap, tech names of NASDAQ remained wide, further pushing the YTD differences to a very big gap – as NASDAQ is up over 26% YTD whereas the DJIA is up about 1% YTD.

For the month of September:

• The DJIA retreated 3.5%;
• The S&P 500 lost 4.9%;
• NASDAQ declined 5.8%; and
• The Russell 2000 dropped 6.0%.

In keeping with U.S. markets, performance in developed markets outside the U.S. in September was dismal too – as every one of the 38 developed markets tracked by MSCI was negative. Performance in the emerging markets tracked by MSCI was just as bad, with 45 of those 46 indices declining in August.

The themes that drove market performance in September once again centered around inflation, the Fed, retail sales, housing and the labor market, with recent numbers causing the Fed to pause its rate hiking trend – for now. But recent spikes to inflation have Wall Street bracing for at least one more rate hike before 2023 comes to a close.

Volatility, as measured by the VIX, trended up overall in September, beginning the month under 14 and ending the month at 17.52, with a couple of spikes closer to 19 late in the month.

West Texas Intermediate crude also trended up this month, gaining over $7 to end the month just shy of $91/barrel.

Market Performance Around the World

Investors looking outside the U.S. saw rotten performance, as all 38 of the developed markets tracked by MSCI retreated this month – with the majority losing more than 4%. Unfortunately, September was just like last month.

Performance for emerging markets was just as dismal, with 45 of the 46 indices retreating for the month – with the majority losing more than 3%.

Sector Performance Mostly Negative

For the month of September, sector performance was almost entirely negative, save for the Energy sector which rose more than 3%. Interestingly that was exactly what happened last month too.

Contrast the poor performance in September and August with the month of July and you see two very different stories, as sector performance was red hot in July, with all 11 S&P 500 sectors advancing.

For a longer-term perspective, July’s sector performance was a continuation of June’s, which also saw all 11 S&P 500 sectors gain ground. Contrast that with May, which say 8 of the 11 lose ground, July was much more in line with the month of April (and June), when all 11 S&P 500 sectors advanced.

In addition, for September, the range in sector-returns was decently wide relative to previous months, with Energy up over 3% and Utilities down almost 7%.

And if you needed more bad news, 9 sectors performed worse in September relative to August. And the other two sectors were barely better.

Here are the sector returns for the month of September and August (two very short time-periods):

GDP Up 2.1% in Second Quarter

The Bureau of Economic Analysis Real reported that Gross Domestic Product increased at an annual rate of 2.1% in the second quarter of 2023. In the first quarter, real GDP increased 2.2 percent (revised).

The increase in real GDP reflected increases in nonresidential fixed investment, consumer spending, and state and local government spending that were partly offset by a decrease in exports. Imports decreased.

Compared to the first quarter, the deceleration in real GDP in the second quarter primarily reflected a deceleration in consumer spending, a downturn in exports, and a deceleration in federal government spending that were partly offset by an upturn in private inventory investment, an acceleration in nonresidential fixed investment, and a smaller decrease in residential investment. Imports turned down.

Fed Holds Rates Steady – For Now

Wall Street and Main Street toggled between hope that the Fed might be done with its rate-hiking and worry from the Fed’s recent and very hawkish comments from its last meeting. And as expected, the big news on the month was that the Fed decided to leave its fed funds rate (its short-term lending benchmark) at a target range of 5.25% to 5.50%, the same level established at its July meeting.

But confounding Wall Street was the Fed’s updated Summary of Economic Predictions where another rate hike this year was very much on the table. In addition, the Fed surprised many with an outlook for rates next year that were notably higher than expected as were their 2025 rate predictions.

Consumer Confidence Declines Again

The Conference Board Consumer Confidence Index declined again in September to 103.0 (1985=100), down from an upwardly revised 108.7 in August. In addition:

• The Present Situation Index – based on consumers’ assessment of current business and labor market conditions – rose slightly to 147.1 (1985=100) from 146.7.
• The Expectations Index – based on consumers’ short-term outlook for income, business, and labor market conditions – declined to 73.7 (1985=100) in September, after falling to 83.3 in August.
• Expectations fell back below 80 – the level that historically signals a recession within the next year. Consumer fears of an impending recession also ticked back up, consistent with the short and shallow economic contraction we anticipate for the first half of 2024.

“Consumer confidence fell again in September 2023, marking two consecutive months of decline. September’s disappointing headline number reflected another decline in the Expectations Index, as the Present Situation Index was little changed. Write-in responses showed that consumers continued to be preoccupied with rising prices in general, and for groceries and gasoline in particular. Consumers also expressed concerns about the political situation and higher interest rates. The decline in consumer confidence was evident across all age groups, and notably among consumers with household incomes of $50,000 or more.”

Assessment of Family’s Current Finances

Consumers’ assessment of their Family’s Current Financial Situation turned more negative in September.

Recession Looming?

Consumers’ Perceived Likelihood of a US Recession over the Next 12 Months rose in September.

Existing Home Sales Drop

The National Association of Realtors reported that existing-home sales moved lower in August and that among the four major U.S. regions, sales improved in the Midwest, were unchanged in the Northeast, and slipped in the South and West. Further, all four regions recorded year-over-year sales declines.

Further:

• Existing home sales across regions: Northeast (unchanged); Midwest (+1.0%); South (-1.1%); and West (-2.6%).
• Median home prices by region year-over-year: Northeast (+5.8% to $465,700); Midwest (+6.8% to $305,300); South (+3.2% to $366,100); and West (+1.0% to $609,300).
• The inventory of homes for sale at the end of August was 1.10 million units, down 0.9% from July and down 14.1% from a year ago.
• Unsold inventory sits at a 3.3-month supply at the current sales pace, unchanged from July and versus 3.2 months in August 2022. It remains well below the 6.0-month’ supply typically associated with a more balanced market.
• First-time buyers accounted for 29% of sales in August, versus 30% in July and 29% a year ago.
• All-cash sales comprised 27% of transactions in August, up from 26% in July and 24% in August 2022.
• 72% of homes sold in August were on the market for less than a month. Properties typically remained on the market for 20 days, the same as July and up from 16 days in August 2022.

Homebuilding at 3-Year Low

The U.S. Census Bureau reported its August New Monthly Construction data. To summarize: U.S. homebuilding plunged to more than a 3-year-low as high mortgage rates weighed on demand, but a surge in permits suggests new construction is still supported by a demand for homes (or lack of supply).

Building Permits

• Privately-owned housing units authorized by building permits in August were at a seasonally adjusted annual rate of 1,543,000.
• This is 6.9% above the revised July rate of 1,443,000, but is 2.7% below the August 2022 rate of 1,586,000.
• Single-family authorizations in August were at a rate of 949,000; this is 2.0% above the revised July figure of 930,000.

Housing Starts

• Privately-owned housing starts in August were at a seasonally adjusted annual rate of 1,283,000.
• This is 11.3% below the revised July estimate of 1,447,000 and is 14.8% below the August 2022 rate of 1,505,000.
• Single-family housing starts in August were at a rate of 941,000; this is 4.3% below the revised July figure of 983,000.

Housing Completions

• Privately-owned housing completions in August were at a seasonally adjusted annual rate of 1,406,000.
• This is 5.3% above the revised July estimate of 1,335,000 and is 3.8% above the August 2022 rate of 1,355,000.
• Single-family housing completions in August were at a rate of 961,000; this is 6.6% below the revised July rate of 1,029,000.

Builder Confidence Wanes

This is on the heels of the National Association of Home Builders reporting that: “builder confidence in the market for newly built single-family homes in September fell five points to 45, according to the National Association of Home Builders (NAHB)/Wells Fargo Housing Market Index.” This follows a six-point drop in August.

From the NAHB release: “As mortgage rates stayed above 7% over the last month, more builders are reducing home prices again to bolster sales. In September, 32% of builders reported cutting home prices, compared to 25% in August. That’s the largest share of builders cutting prices since December 2022 (35%). The average price discount remains at 6%. Meanwhile, 59% of builders provided sales incentives of all forms in September, more than any month since April 2023.”

Service Sectors Losing Momentum

S&P released its report with the following headline: “Further loss of service sector momentum weighs on overall US economic performance.” The release stated that “US businesses signaled a broad stagnation in output at the end of the third quarter as manufacturers and service providers alike indicated muted demand conditions. September data indicated the worst performance across the private sector since February, as the service economy lost further momentum. New orders fell at the strongest pace this year so far as demand for services slipped further into contractionary territory. Manufacturers also saw a drop in new sales, albeit at a slightly softer pace. Cost pressures ticked higher again, as input prices rose at a marked pace. Nonetheless, the rate of cost inflation was much softer than those seen on average throughout the last three years. Firms continued to pass through higher costs to clients, but weak client interest stymied their ability to hike selling prices as the pace of increase matched that seen in August.”

Durable Goods Orders Up

New Orders New orders for manufactured durable goods in August, up five of the last six months, increased $0.5 billion or 0.2 percent to $284.7 billion, the U.S. Census Bureau announced. This followed a 5.6 percent July decrease.

• Excluding transportation, new orders increased 0.4 percent.
• Excluding defense, new orders decreased 0.7 percent.
• Machinery, up four of the last five months, led the increase, $0.2 billion or 0.5 percent to $37.8 billion.

Investor Confidence Index Inches Up

State Street Global Markets released the results of the State Street Investor Confidence Index for September 2023.

“The Global Investor Confidence Index increased to 108.7, up 0.9 points from August’s revised reading of 107.8. The increase in Investor confidence was driven by a 11.0 point jump in Asian ICI to 112.6, and, to a lesser extent, a 0.8 point rise in North American ICI to 104.7. European ICI, meanwhile, declined 6.2 points to 97.5.”

Sources

conference-board.org; Nar.realtor ; census.gov; nahb.org; splglobal.com; fidelity.com; statestreet.com ; msci.com; nasdaq.com; wsj.com; morningstar.com; census.gov;