U.S. stocks delivered their worst monthly performance since the depth of the pandemic sell-off in March 2020, capping the S&P 500 and Nasdaq Composite with their third straight quarterly losses for the first time since the global financial crisis in 2008 and 2009. Moreover, the S&P 500 posted its worst September loss since 2002. Equities have been stung by a series of three successive ¾ point (0.75%) central
bank rate hikes since mid-June, the last of which on September 21 brought the Fed Funds key lending rate to a target range of 3.0%-3.25%. Fed policymaker’s interest rate projections now show a steeper frontloaded rate path than previously expected. The median Fed Funds rate is expected to end this year at 4.4%, implying another 0.75% hike likely in November followed by at least a 0.50% increase in December.
The 100 largest Nasdaq stocks (the Nasdaq 100 Index) skidded more deeply into a bear market, down 32.35% year-to-date (YTD). The growth-focused Nasdaq index has suffered steep losses this year in part because rising interest rates make future profits from growth companies less attractive. More broadly, analysts’ consensus view for third quarter S&P 500 year-over-year (Y/Y) earnings growth is 4.5%, down from an 11.1% estimate when the quarter began.
Battling inflation is proving challenging for the Federal Reserve. The price consumption expenditures (PCE) price index (the Fed’s preferred measure of inflation) increased by 0.3% in August, following a 0.1% decline the month prior. From a year ago, the PCE price index is up 6.2%, more than three times the Fed’s 2% inflation target. Meanwhile, the core PCE price index (excluding volatile food and energy) rose 0.6% M/M and is up 4.9% Y/Y.
Looking at stocks by market capitalization, large and mid caps slightly outperformed small capitalization stocks for the month and YTD, small caps fell the least in the third quarter. As shown in the style box performance boxes below, growth stocks mostly moderately outperformed their value counterparts in September and the 3Q. The opposite prevailed on a YTD basis with notably smaller losses in value versus
In the sector performance tables below, all 11 major sector groups ended negative in September. In the third quarter Consumer Discretionary and Energy delivered positive returns while Communication Services lagged across all three time periods. Despite falling oil and natural gas prices, Energy sector stocks remain the standout performers this year. Crude oil has fallen in recent months as central banks tighten monetary policy to combat inflation. Chinese oil demand has faltered due to its COVID-19 lockdown policy. Aggressive Fed rate hikes also lifted the U.S. Dollar Index to 20-year highs and as most oil contracts are priced in dollars, a stronger dollar makes crude oil more expensive for foreign buyers, dampening demand. U.S. WTI crude oil ended the month down 11% at $79.49/barrel, and down nearly 25% in the 3Q, its first quarterly loss in over two-years.
Internationally, the MSCI EAFE Index, representing developed markets outside the U.S. and Canada, had fairly comparable losses to the United States in September, but saw deeper losses for the quarter, almost twice as much. Emerging markets were decidedly worse, with double-digit percentage losses in all three-time periods. China (-22.50%), South Korea (-16.40%) and Taiwan (-14.47%) fell the most among third quarter decliners, while India rallied 6.50%. Globally, the MSCI All-Country World Index fell 6.82% in the third quarter, while the ACWI, excluding U.S. performance, fell a larger 9.91%.
U.S. Treasurys, as measured by the Bloomberg U.S. Government Bond Index, fell 4.30% in the third quarter, and slumped 12.95% YTD. Looking at yields, the benchmark 10-year Treasury yield has jumped from 1.51% at the start of the year to 3.796% at the end of the third quarter. Spurred by aggressive Fed tightening and posturing Its yield advanced for a ninth-straight week, its longest yield rally since early 1994, jumping 1.18 percentage points over the period.
In other fixed-income assets, investment-grade bonds of all types (as measured by the Bloomberg U.S. Aggregate Bond Index) also ended the quarter with deep losses, sliding nearly 4.75% in the third quarter and down over 14.6% YTD. Municipal bonds had smaller losses, giving back almost 3.5% last quarter to extend its YTD loss to over 12% YTD. Non-investment-grade high-yield debt fell the least during the quarter, with the Bloomberg U.S. Corporate High Yield Index down less than 1% last quarter to extend its YTD loss to 14.7%.
This report is created by Cetera Investment Management LLC. For more insights and information from the team, follow @CeteraIM on Twitter.