US stocks fell sharply in September to end a disappointing third quarter. Aggressive moves from central banks around the world increased global recession fears. Earnings for S&P 500 companies were strong in the second quarter with 75% beating estimates. Of the 106 companies that issued third quarter EPS guidance, 65 issued negative guidance and 41 issued positive guidance. Economic news was mixed over the month. US employers adding 315,000 jobs in August, slightly less than the 318,000 economists had forecasted and well below the 526,000 added in July. The unemployment rate increased for the first time this year in August to 3.7%, up from 3.5% in July. CPI increased by 8.3% in August, above the expected 8.1%, but lower than the 8.5% increase in July. Core CPI, which excludes energy and food prices, increased 6.3% in August from a year earlier, higher than the 6.1% expected. On a monthly basis, core CPI rose 0.6% in August, above the 0.3% increase expected and double the increase from July. The personal consumption expenditures index, the inflation gauge the Fed prefers, was up 6.2% in August from a year earlier, below the 6.4% increase in July. US manufacturing activity grew in August at the same rate as July with the pace of growth remaining at low levels. U.S. home prices fell in July for the first time in years as higher mortgage rates started to weigh on prices.
Foreign stocks also declined sharply in September and for the third quarter as global recession fears increased. The Bank of England increased its key interest rate by 0.5% to 2.25% marking the seventh consecutive increase. In a move contrary to the efforts of the BOE to curb inflation, the UK government announced tax cuts and energy subsidies that caused significant market volatility. The BOE had to step in and buy long term bonds to stabilize the market. The U.K.’s annual inflation rate rose by 9.9% in August down from 10.1% in July. The European Central Bank (ECB) increased its key rate by 0.75%, following the 0.50% increase in July, and signaled further rises were likely over the coming months. ECB President Christine Lagarde warned that inflation was spreading beyond energy and said the ECB was ready to increase rates aggressively over the next several meetings. The eurozone’s headline inflation rate hit 9.1% in August, higher than the 9% expected and up from 8.9% in July. Oil prices continued to fall in September ending at $79.49 per barrel down from $89.55 at the end of August. Developed markets topped emerging markets over September, the third quarter, the year to date, and trailing year.
Interest rates rose in September driving bond prices sharply lower as bond markets processed aggressive rate hikes from the world’s central banks. The Federal Reserve increased the federal-funds rate by 0.75% to a range between 3% and 3.25% and signaled additional large increases were likely even though they would increase the risk of a recession. New projections show the rate rising to between 4% and 4.5% by the end of the year, which would call for sizable rate increases at the November and December meetings. Fed Chairman Jerome Powell said, “We have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.” The yield on the 10-year Treasury moved significantly higher in September and the third quarter ending the month at 3.80% up from 3.13% at the end of August and 2.93% to start the quarter. The rate for a 30-year fixed-rate mortgage increased rose above 6%, its highest level since 2008, more than double the rate from a year ago. US Agency bonds were the top performer for September, 3Q, and the year to date and shorter term bonds outpaced longer term bonds for September, 3Q, and the year to date.
|Index Performance||Sept.||3Q||Year to Date||Trailing 12 Months|
|US Stocks (Russell 3000)||-9.27%||-4.46%||-24.62%||-17.63%|
|Foreign Stocks (FTSE AW ex US)||-9.95%||-9.65%||-25.86%||-24.52%|
|US Bond Mkt. (BBgBarc Int. Gov/Cred)||-2.67%||-3.06%||-9.63%||-10.14%|
|Municipal Bonds (BBgBarc 1-10 Yr Muni)||-2.47%||-2.25%||-7.17%||-7.08%|
|Cash (ICE BofA ML 3-Mo T-Bill)||0.25%||0.46%||0.57%||0.58%|