In September, the market experienced a continuation of trends from the second half of August as major stock indices declined further.
The S&P 500, Dow and Nasdaq fell 9.3%, 8.8%, and 10.5%, respectively, pushing all major indices into bear market territory. In response to market volatility, the VIX rose sharply to 31.62, its highest level since June. Following the market downturn, Bitcoin prices declined 3.8% over the month, ending at $19,425. While many of the themes from last month remain relevant, what has changed?
- Reaccelerating inflation punishes the market. The Consumer Price Index, a common measure of inflation, shook the markets despite a continued decline in energy prices. The broader core inflation measure reaccelerated to 0.6% month-over-month, double its previous rate. While no one data point should be weighed too heavily, the reversal of promising inflation data has caused investors to fear that higher prices will be persistent.
- The Fed projects more rate hikes to rein in inflation. As a result of increased inflation worries, the Federal Reserve hiked rates by 75 basis points to a target range of 3% to 3.25%. The Fed has also communicated their intent to continue to raise interest rates in order to return inflation to its 2% target. The Fed’s latest projections show interest rates increasing to 4.4% by year end and 4.6% at the end of 2023.
- The S&P 500 is trading at its lowest level since 2020. As a result of ongoing inflation and expectations for higher interest rates over the next year, major market indices have pulled back again, reaching their lowest point since December 2020. The communication services sector of the S&P 500 has fared the worst with a year-to-date decline of 39.4%, while the energy sector continues to post positive returns of 30.7% year-to-date. For investors who can look past market swings, pullbacks can represent periods of opportunity when prices and valuations are the most attractive.
- The dollar has strengthened over the year. The Broad U.S. Dollar Index, a measure of the dollar’s strength against foreign currencies, has increased 10.5% year-to-date as economic uncertainty has risen in the past months and the Federal Reserve has increased interest rates. The dollar has strengthened significantly against both developed and emerging market currencies. The relative strength of the dollar presents investors and consumers with buying opportunities abroad, but has also degraded returns from foreign investments and made U.S. exports less attractive to foreign consumers.
While last month’s market movements were characterized by uncertainty, recent inflation data and Federal Reserve projections for monetary policy have clarified the path forward. Continued broad-based price increases and anticipated Fed hikes pose challenges to the market that must be overcome. While market pullbacks are rarely welcome, long-term investors could benefit by remaining disciplined and taking advantage of attractive valuations.
Chart: S&P 500 sectors have differed significantly in performance this year
Sources: Clearnomics, Standard & Poor’s