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Markets Slipped Sharply in September Thumbnail

Markets Slipped Sharply in September

Markets sure lived up to their September reputation, slipping sharply as investors digested fresh looks at a slew of economic data points, updates to monetary policy, and changes to the longer-term outlook of interest rates.

In US equity news, stocks saw broad-based selling with both large and small caps losing between 9-10%. The latest move down appeared to be driven primarily by a more aggressive federal reserve (restrictive monetary policy can hamper stock valuations and economic growth) and an inflation print for the month of August that came in higher than expected. Markets have now seemingly abandoned the idea of a “fed pivot” and are mulling the effects of tighter monetary policy alongside still-high inflation. Value stocks held up better than growth stocks amid volatile trading, which is in line with what we’ve seen so far this year.

Stocks sold off to a similar extent abroad, with international developed stocks (represented by the MSCI EAFE Index) returning -9.35% and emerging markets stocks returning -11.72%. Many countries around the globe are dealing with high inflation and have been slower to adjust monetary policy for a variety of reasons, including geopolitical events and economic recoveries on shakier footing. One story worth noting has been the surge of the US dollar against other currencies (most notably the euro, pound, and yuan) – this phenomenon has taken a sizeable bite out of returns for US investors.

Fixed income markets also declined during the month as the federal funds rate was increased by 0.75% for the third consecutive time at the September meeting. Municipal bonds held up slightly better than the US Aggregate Index both during the month and YTD. We also gained a glimpse at the FOMC’s latest “dot plot”, which maps the median expectation from Fed officials of the path of the rate going forward. The committee now expects the rate to hit 4.6% by the end of 2023, up from 3.8% as of June’s projection, but of course, these estimates are subject to change quickly as we’ve seen thus far this year. Though the rapid rise of rates has driven bond prices lower, one bright spot is that yields on fixed income assets now look much more attractive relative to where they came from.