Good riddance September. It was not nice knowing you, which is often the case for the stock market in September. This year, though, you were particularly awful. I’ll be covering the current market (and recession) in a more in-depth blog post soon. For now, we’ll just focus on last week’s dumpster fire of a market.
Including the week’s losses, the Dow, Nasdaq, S&P 500, Russell 2000, and S&P Midcap 400 declined 9.0%, 10.5%, 9.3%, 9.7%, and 9.4%, respectively, in September.
The week had the same feeling of desperation as recent weeks have had. The desperation was rooted in concerns about rising interest rates, the extreme volatility seen in currency and bond markets, and worries that the global economy is headed for a recession.
Aside from that, there was a nagging concern that the volatility across capital markets and the rapid increase in interest rates are going to lead to a “financial accident” that could have systemic implications. That worry was a major headwind and it was given some credence when the Bank of England (BoE) stepped in Wednesday to buy UK government bonds in a bid to restore orderly market conditions.
That move by the BoE was reportedly precipitated by pension funds running into trouble with derivative positions that were leading to margin calls and forced selling. The BoE was slated to begin selling gilts next week. It was forced to postpone that effort, and instead it will carry out temporary purchases of UK government bonds between September 28 and October 14.
The stock and bond markets staged a notable rally on Wednesday following the decision. The S&P 500 jumped nearly 2.0% and the 10-yr note yield pivoted from 4.00% to 3.75%.
The British pound also found some welcome support after hitting a record-low against the dollar earlier in the week when the BoE held off with any support measures, saying only that it will make a “full assessment” of matters at its next scheduled meeting. The untenable action in the bond market and mounting losses for pension funds, however, ultimately forced the BoE’s hand.
The good vibes from the BoE announcement were short-lived. On Thursday Prime Minister Truss said she will be sticking with her tax cut plan, the announcement of which last week was the source for the sharp selling of gilts and the pound.
Everything that was gained on Wednesday in the stock market was given back on Thursday and then some.
There were other factors in play for yet another losing week. One of the biggest overhangs was the weakness in Apple (AAPL). It dropped 8.1% this week, with most of those losses coming on Thursday and Friday. The selling was attributed to worries about demand for the new iPhone. BofA Securities downgraded Apple on Thursday to Neutral from Buy, citing concerns about negative estimate revisions being driven by weaker consumer demand.
Apple’s problems bled over to other mega-cap names, as well as supplier stocks, the major indices, and a plethora of funds that hold it as a core position. The Vanguard Mega-Cap Growth ETF (MGK) declined 3.4% this week, leaving it down 10.7% for the month.
The loss of leadership from Apple weighed heavily on investor sentiment and contributed to the S&P 500 breaking down to new lows for the year. Most stocks, though, contributed to that breakdown, including Nike (NKE), which slumped 12.8% on Friday after reporting a huge inventory build (+44% yr/yr) for its fiscal Q1 and warning that it expects to face continued gross margin pressure in fiscal Q2. Nike’s challenges, and an earnings warning from Rent-A-Center (RCII), added to the market’s slowdown worries.
The only sector to end the week with a gain was energy (+1.8%). The remaining ten sectors recorded losses ranging from 0.7% (materials) to 8.8% (utilities).
It didn’t help matters this week that most Fed officials with speaking engagements spoke to the need to keep raising rates to get inflation under control. Cleveland Fed President Mester (FOMC voter) arguably had the most damning remark for the stock market, saying that policy rates are not yet at the restrictive level. Separately, a record-high 10.0% yr/yr increase for CPI in the eurozone seemingly solidified expectations for a 75-basis point hike by the ECB at its October meeting.
That CPI number was out on Friday along with the PCE Price Index for August. The latter showed a slight moderation in the year-over-year rate to 6.2% from 6.4% in July; however, the core-CPE Price Index, which excludes food and energy, jumped to 4.9% year-over-year versus 4.7% in July. That indication, coupled with the lowest initial jobless clams reading on Thursday (193,000) since early May, continued to stoke concerns about the Fed pursuing an aggressive rate-hike policy.
The week also ended on a down note geopolitically. President Putin announced the unlawful annexation of four Ukraine regions on Friday, as expected. That move will not be recognized by Ukraine and most other countries, but since it is being recognized by Putin, it will raise the temperature around this conflict since he has said Russia will use any means necessary, including nuclear weapons, if its territory is threatened.
Altogether it was a tough end to the week, which brought a very tough month to a close while leaving a lot of bothersome issues unresolved and a stock market deeper in bear market territory.
Good riddance September – don’t let the door hit you on the way out.
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Source: Briefing Investor