Piton September Market Review
September officially kicked off the beginning of a Federal Reserve "easing cycle." A more assertive 50 basis point lowering of the federal funds rate gave all investors new insight. Equity markets kept rolling as rotations continued, while bonds notched a solid performance. The FOMC continued to be the main catalyst with a "victory lap" on inflation and a pivot to the employment picture and the US consumer. Geopolitical tensions continue to play a daily role in markets. The US presidential election is upon us, and last month's debate tightened the race.
September did not start out great for equity markets. Post Labor Day, weaker economic data coupled with slower chip sales hit equity markets sharply. As rates ground lower and the probability of a "soft landing" grew, equities continued to march higher. Once Fed policy was digested by investors, stock prices jumped. In the 3rd quarter, equity rotation continued. The historically defensive utility sector returned over 18%, leading all sectors. Real estate companies also rebounded (> 16% in Q3) as rates came down. Industrials and financials also gained over 10% in the quarter.
Treasury prices rose right up until the FOMC meeting but retraced substantially in a classic "sell the news" environment. Fixed income still managed to have relatively positive results. In fact, investment grade fixed income had strong total returns in every month in the third quarter. The front end outperformed longer dated bonds, and on September 4th, the yield curve "dis-inverted" for only the second time in two years. That "steepening" trend has continued, and third quarter saw US treasury 2-year notes drop by 113 basis points while US Treasury 10-year notes fell by 65 basis points.
Credit sectors, which saw some spread-widening early in the month, rebounded swiftly as the FOMC lowered rates and raised the possibility of soft landing in the US economy. Financial, utilities, and industrial bonds in the investment grade space outpaced government bonds. In addition, high beta sectors moved higher. Preferred bonds have moved higher by 7% in the 3rd quarter, and 11% for the year. High yield and emerging markets also rose, giving them 8% returns so far in 2024. Municipal debt rose approximately 1%, bringing municipal yield ratios versus comparable treasuries closer to "the expensive side of fair value."
Data Recap
While last month was a FOMC-centric market, the hyper-sensitivity to economic data points continues to drive volatility in major markets. Europe cut rates again on September 12th, saw inflation fall below 2%, and had slower economic data points. China is stimulating its economy, and markets have reacted positively. The war in the Middle East seems more likely to escalate. The US is getting closer to a pivotal election, and last month, it had its second debate. The following week, there was another assassination attempt on former President Trump. The Federal Reserve is beginning the normalization of rates, the potential for slower economic growth, and the geopolitical back-drop is making asset allocators take notice of the investment grade bond market and liquid government bonds with palatable yields.
While weekly jobless claims remained low, monthly nonfarm payroll numbers came in slightly weaker than expectations. Chairman Powell noted the lower job revisions and that it was a focus of the Fed not to see these figures accelerate.
Consumer confidence dropped last month. On September 24th, data showed that confidence fell to its lowest point since March 2021.
The Federal Reserve cut the Federal funds rate on Septemeber 18th by 50 basis points (to 4.75% - 5.00% range). Markets were volatile yet muted immediately after the release and Chairman Powell's press brief. One key takeaway was that there was a dissension (rather than a unanimous decision), and not all Fed Governors' "dot-plot" predictions coincided. Nonetheless, the Fed has begun to lower rates. The path and scope of each move will be data dependent, and as Chairman Powell stated, there is no set path. The economy, especially the job market and the consumer, seem to be their new focus, as inflation continues to fall close to their target rate. November 7th is the next FOMC meeting…two days after the US election.