It was a classic “Charlie Brown” moment: Hopes had been building throughout the summer for a Federal Reserve “pivot” that would have the central bank step back a bit from its policy of aggressive interest rate tightening. As a result, stocks rallied early in the month. For the week ending September 9, the Dow Jones was up 2.7%, the S&P 500 3.6%, and the Nasdaq 4.1%. All 11 sectors of the S&P posted weekly gains for the first time since February 2021 (Wall St. Journal, Sept. 9).
But this thesis, plausible on its face, was quickly unwound by events, and by Federal Reserve Chairman Powell, who left no doubt he was pulling away the football. On September 21, the central bank announced a third straight increase of 75 basis points to the federal funds rate, bringing the rate to a range of 3-3.25% (CNBC, Sept. 21). At his press conference, Powell reiterated the Fed’s commitment to bringing inflation back down to 2.0% and to restoring “price stability.” Stocks fell sharply on the day, with the Dow and the S&P both dropping -1.7%, and the Nasdaq declining -1.8%.
That set the tone. By month’s end, the Dow was off -8.8%, the S&P -9.3%, and the Nasdaq -10.5%. The S&P 500 fell -12.0% in the last three weeks alone, the worst September in two decades. The yield on the 10-year treasury stood at 3.8% as global bonds fell into the first bear market in a generation (Bloomberg, Sept. 1).
Behind the numbers
Meanwhile, multiple data points supported the contention that higher rates were starting to slow the economy. Housing in particular has been hard hit with prices falling for the first time since 2012 (Bloomberg, Sept. 27). Mortgage rates topped 6.0% (Wall St. Journal, Sept. 15).
Job growth, however, has remained robust. The August employment report, out on September 2nd, showed an increase of 315,000 jobs and an unemployment rate of 3.7% (Dept. of Labor, Sept. 2). Jobless claims mostly declined, hitting a five-month low for the week ended September 24, at 193,000 (Reuters, Sept. 29).
Inflation, and the strength of the dollar, remained major concerns. The Consumer Price Index (CPI) rose 8.3% year-over-year in August, down from 8.5% in July. But core CPI, excluding energy and food, was up 6.3% annualized, compared to 5.9% the month before (Wall St. Journal, Sept. 13). The Personal Consumption Expenditures index, usually referred to as the Fed’s favorite inflation barometer, was up 0.6% in August, excluding food and energy, compared to being flat in July. Year-over-year the index rose 4.9% compared to 4.7% the month before (CNBC, Sept. 30).
But there were also signs that inflation may be slowing, or soon will be. Rents declined on a national basis in August for the first time in two years (Wall St. Journal, Sept. 26). Oil prices continued to fall (Wall St. Journal, Sept. 13) as did the price of gas (Wall St. Journal, Sept. 11). Globally, inflation was lower as China’s growth slowed (Wall St. Journal, Sept. 4). Meanwhile, the dollar continued to strengthen relative to other major currencies, with the Wall Street Journal Dollar Index up almost 13% in 2022 through early September (Wall St. Journal, Sept. 5).
September marks the end of the quarter which means that 3Q earnings reports will soon be rolling in. As might be expected, estimates are generally moving lower. FactSet’s Earnings Insight was projecting a 2.9% increase in S&P 500 earnings as of September 30, the slowest level since Q3 2020 and down from 9.8% on June 30 (FactSet, Sept. 30).
It takes time for the impact of rising rates to work their way through the economy, but the repercussions are clearly being felt. Not surprisingly, some investors are again starting to give voice to concerns that the Fed will over-tighten, triggering a recession. Even Fed Vice Chairman Lael Brainard is starting to muse about the pace of tightening, according to Bloomberg (Bloomberg, October 1). Should the preponderance of data continue to show a slowing economy, those voices are likely to grow louder heading into year end.
Related: Can Rising Rates Work to the Advantage of Bond Investors?