US Markets
Stocks lost a portion of their first-half gains in the third quarter as a continued tight monetary bias from the Federal Reserve sent bond yields higher, unsettling stock investors throughout August and September.
For the three months ending September 30, the Dow Jones Industrial Average declined 2.62%, while the Standard & Poor’s 500 Index lost 3.65%. The Nasdaq Composite fell 4.12%.1
A July Rally Faded
The strong price momentum during the first half of the year continued into the start of the third quarter as stocks rose in July. Cooling inflation, a better-than-anticipated kick-off to second-quarter earnings reports, and a growing belief that the U.S. economy may avoid falling into a recession helped fuel the gains.
However, in August, sentiment turned. Multiple headwinds—including rising bond yields, credit rating downgrades (both U.S. government debt and corporate debt), and continued economic weakness in China—dampened enthusiasm.
A late-month rally trimmed losses, although it wasn’t enough to keep August from ending in the red.
Headwinds in August
August’s stock slide continued into September. An early-month rally faded, beginning with the start of a labor strike at the major automakers and a drop in consumer confidence. Rising oil prices further darkened investor mood as it fueled fears that the Fed might need to raise rates again to combat inflation caused by higher energy prices.
Earnings Outlook Brightens
The second-quarter earnings season, which largely ended in August, helped support stocks with better-than-expected results. As of August 25th, with 485 of the companies in the S&P 500 reporting, 79% posted earnings above market estimates.2
Perhaps more importantly, Wall Street’s outlook for third-quarter earnings improved during the quarter. Consensus analysts’ forecasts are estimating a 0.2 percent growth in earnings for the S&P 500 companies. Although this forecast appears slightly underwhelming, it would mark the first quarter of year-over-year earnings growth since the third quarter of 2022.3
Q3 Sector Scorecard
Most industry sectors experienced declines in the third quarter, including Consumer Discretionary (-5.20%), Consumer Staples (-7.23%), Health Care (-3.01%), Industrials (-5.53%), Materials (-5.21%), Real Estate (-9.60%), Technology (-5.71%), Financials (-1.60%), and Utilities (-9.95%). Both Communications Services (+0.75%) and Energy (+11.36%) rose over the last three months.4
What Investors May Be Talking About in October
The Fed elected to keep interest rates unchanged following the September meeting of the Federal Open Market Committee (FOMC), despite some hotter-than-expected inflation data. The Fed has not signaled what it may do with regards to rates at its upcoming two-day meeting, ending on November 1st, indicating that its decision will be data dependent.5
With the government shutdown averted in late September, the Fed will have current data when the FOMC meets.
Expect investors to be especially sensitive to September inflation data, which is scheduled to be released in mid-October. Should consumer prices and producer prices be higher than anticipated, the prospect of a rate hike may potentially jump.
However, if the report data comes in lower than expected it may take some pressure off the Fed.
World Markets
For Q3 2023, the MSCI-EAFE Index fell 4.71%.6
European markets were mixed, with quarterly losses in France (-3.84%), Germany (-4.71%), and Spain (-1.72%). The U.K. tacked on 1.02% and Italy was flat (+0.04%).7
Pacific Rim markets were down for the quarter, with China’s Hang Seng falling 5.85% and Japan’s Nikkei dropping 4.01%.8
The Fed
After raising interest rates by a quarter of a percentage point in July, the FOMC elected to keep interest rates unchanged following their September 19–20 meeting. They did, however, signal that another rate hike was likely before the end of the year.
In his post-announcement press conference, Fed Chair Jerome Powell emphasized that the inflation battle was not finished and future rate hike decisions would be based on the economic data.18
With the government shutdown averted in late September, the Fed will have current data when the FOMC meets Oct. 31–Nov. 1.
Our blog posts are intended for information purposes only and should not be interpreted as financial advice.
You should always engage the services of a fully qualified financial planner before entering any financial contract.
To discuss engaging the services of Fortitude Financial Planning please email us at info@fortitudefp.ie.
Fortitude Financial Planning Ltd will not be held responsible for any actions taken as a result of reading these blog posts.
1. WSJ.com, September 30, 2023
2. LipperAlpha.Refinitiv.com, August 25, 2023
3. FactSet.com, September 15, 2023
4. SectorSPDR.com, September 30, 2023
5. FederalReserve.gov, 2023
6. MSCI.com, September 30, 2023
7. MSCI.com, September 30, 2023
8. MSCI.com, September 30, 2023
9. MarketWatch.com, September 28, 2023
10. WSJ.com, September 1, 2023
11. Finance.Yahoo.com, September 14, 2023
12. MarketWatch.com, September 15, 2023
13. Bloomberg.com, September 19, 2023
14. CNBC.com, September 21, 2023
15. Morningstar.com, September 26, 2023
16. WSJ.com, September 13, 2023
17. WSJ.com, September 27, 2023
18. WSJ.com, September 20, 2023
19. Health.gov, 2023
20. BusinessInsider.com, January 1, 2023
21. Census.gov, 2023
22. WHO.int, 2023
23. CBO.gov, 2023
24. CDC.gov, 2023
Production