The Month Of September Has Been The Worst-Performing Month Of The Year Historically For The Stock Market. Unfortunately, It Is Living Up To That Historical Reputation This September. Following A 4.6% Decline This Week, The S&P 500 Is Down 6.6% For The Month.
The weakness hasn't been reserved for the S&P 500. It has spread across the stock market and has been even more pronounced in other places. The Nasdaq declined 5.1% this week and is down 8.0% for the month. The Dow Jones Industrial Average fell 4.0% and is down 6.1% for the month. The S&P Midcap 400 Index dropped 5.9% this week and is down 7.9% for the month. The Russell 2000 sank 6.8% this week and is down 8.9% for the month.
The losses mounted this week in the stock market for a variety of reasons. Rising market rates were at the top of the list. The 2-yr note yield spiked 36 basis points to 4.21% (having hit 4.26% at its high of the week) and the 10-yr note yield surged 25 basis points to 3.70% (having hit 3.82% at its high of the week).
Those moves were precipitated by central bank policy moves and a striking decision by the UK to announce its biggest tax cut in 50 years to stimulate growth while its central bank tries to battle inflation with rising interest rates.
The Fed was at the epicenter of the central bank decisions this week. The FOMC voted to raise the target range for the fed funds rate by 75 basis points to 3.00-3.25%, as many expected, and said it thinks ongoing increases in the target range will be appropriate.
That view was corroborated in the Summary of Economic Projections, which showed a median fed funds rate of 4.4% for 2022 (up from 3.4% in June) and a median fed funds rate of 4.6% for 2023 (up from 3.8% in June). The median rate for 2023 is 3.9%, implying that there is unlikely to be a rate cut in 2023.
Fed Chair Powell worsened the market's mood at his press conference, noting that his main message has not changed since his Jackson Hole speech: "Restoring price stability will require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy."
He added that he thinks the Fed will get to the 4.6% rate relatively quickly and that the moves by the Fed to get inflation back down to the 2% target are likely to cause pain since the rate hikes will inevitably contribute to a weakening in the labor market. The Fed Chair did not say it specifically, but if the price of getting inflation under control is a hard landing for the economy, then so be it.
In fact, a hard landing for the economy was a prominent concern for market participants this week. It led to broad-based selling, rooted in worries that there will soon be large cuts to earnings estimates. Accordingly, there was a reticence to pay up for stocks and an inclination to take risk off the table.
Losses for the 11 S&P 500 sectors ranged from 2.2% (consumer staples) to 9.0% (consumer discretionary). There was a trend of underperformance, however, in the more economically-sensitive parts of the market. The consumer discretionary sector fell 7.0%, the real estate sector declined 6.4%, the materials sector decreased 5.7%, the financial sector sank 5.6%, and the Philadelphia Semiconductor Index dropped 6.0%.
Other central bank moves this week included 50-basis point increases by the Bank of England, the Norges Bank, and the Bank of Indonesia. The Swiss National Bank, meanwhile, increased its key policy rate by 75 basis points to 0.50%, exiting a negative policy rate domain for the first time since 2015.
The Bank of Japan bucked the rate-hike trend. It kept its key policy rate unchanged at -0.1%, and Governor Kuroda said the bank does not expect to raise rates soon. Hoping to fend off a further weakening in the yen, Japan's Ministry of Finance intervened to support the yen for the first time since 1998.
That move was met with limited success given the exorbitant interest-rate differential that remains between the Bank of Japan and many other central banks, namely the Fed. The British Pound was another hot spot in the currency market. GBP/USD plummeted 3.5% on Friday to 1.0856, hitting a 37-year low, as traders did not take kindly to the UK's fiscal stimulus plan and understanding that it will require the issuance of more debt.
For the week, the U.S. Dollar Index surged 3.0% to 113.04.
There was no surge for the stock market, however. On Friday, the Dow Jones Industrial Average took out its June low (29,653.29) and the S&P 500 traded below its June closing low (3,666.77) while managing to hold above the intraday low on June 17 (3,636.87).
On a related note, Goldman Sachs cut its year-end price target for the S&P 500 to 3,600 from 4,300 and said its sees downside potential to 3,150 in the event of a hard landing. That was one more item weighing on investor sentiment on Friday, and it helped to round out another losing week for the stock market.
Dow Jones Industrial Average: -18.6% YTD
S&P Midcap 400: -21.2% YTD
S&P 500: -22.5% YTD
Russell 2000: -25.2% YTD
Nasdaq Composite: -30.5% YTD