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September Review

September has been volatile compared to the rest of the year. Below are the indices returns:

S&P 500 – Down 5.04%1
DJIA – Down 5.27%2
NASDAQ – Down 5.80%3
AGG (Bonds) – Down 1.99%4

The main reasons for this volatility are:

Government shutdown – Fear of the government shutting down because Congress struggled to develop a plan to keep agencies open5. This is a temporary funding bill, so that this topic will come up in the future. 

Oil prices rising – Oil has grown significantly over the past three months due to supply versus demand. Saudi Arabia and Russia have committed to cutting production and drawing down from global inventories. This limits the supply of oil available.

China has had an increase in transportation this year due to coming out of the pandemic.

Also, the U.S. economy has not entered a recession as previously predicted but has grown. This has increased the oil demand, and the U.S. hesitates to increase production due to the negative repercussions of a supply surplus6.

Interest rate fears – On September 20th, the Federal Reserve decided not to raise interest rates and to watch economic data instead to see what they should do. This is excellent news because it means we could be close to the end of interest rate increases. We have another meeting where the Federal Reserve could raise rates (October 31st to November 1st). Traders are now pricing in odds of 29% that policymakers will hike rates at their November meeting7. I think the Federal Reserve will play it safe and raise rates one last time before the holiday season. If this does happen, the market won’t react very kindly.

Another item is the concern that inflation will remain high for a longer-than-expected period. The economy is more robust than expected, and because of that, inflation has been stickier than the Federal Reserve would like. Their goal is to hit 2% inflation by the end of 20258. This means that the Federal Reserve could hold rates steady for most or all of 2024 and slowly decrease interest rates toward the end of 2024 and all of 2025 and 202612. What is interesting is the relationship between the 10-year Treasury Yield and the stock market. If you look up their year-to-date charts, they are almost the opposite of one another since August of this year9.
In the picture above, there are four lines:

Dark blue – 10-year Treasury Bill
Light Blue – DJIA
Pink – S&P 500
Purple – NASDAQ

I’ve circled in red where these indices started to act the opposite of the 10-year Treasury Bill. Once the 10-year Treasury Bill rose above 4%, the indices started to fall and have continued to fall. I’m not saying that every time the 10-year Treasury Bill rises above 4%, the stock market will fall; it’s just an interesting observation I’ve made.

The 10-Year Treasury Bill is rising because it’s factoring in interest rates being higher for longer than expected, so an adjustment is being made in the markets. I’m sure there are many reasons why stocks fall when the 10-year Treasury Bill rises, but one is that consumers will pull their assets out of the stock market and invest in the 10-year Treasury Bill because it’s a guaranteed government-backed risk-free investment. People will return to the stock market once the 10-year Treasury Bill yield starts to fall. Does this movement have a major impact on stock market returns? I don’t think so. I think the majority of people will remain in the stock market and hold their positions. 

I assume that as long as the 10-year Treasury Bill rises, more stocks will fall. Bill Ackman,  CEO of Pershing Square Capital Management, says he sees the 10-Year Treasury Bill rising more than 5%, but not meaningfully above it10. The 10-year Treasury Bill is currently at 4.8020%11, so we still have some volatility to come.

The billion-dollar question is, how much will stocks fall? If I had the answer, we’d all be billionaires!

I see some volatility for the rest of the year. Every month will not be as challenging as September, but we’ll have to wait and see. I think the Federal Reserve will increase interest rates one more time this year and will hold rates steady for at least the first and second quarters of 2024 and will slowly start lowering them at the soonest, the third and fourth quarters of 2024. Hopefully, by the end of 2025, we’ll be closer to the 2% core inflation target, and interest rates will be close to 2% by the end of 2026, if not slightly higher. While rates are stable I think we can expect some growth from the stock markets, and if they start lower we should see some better growth (assuming there aren’t any surprises). If you’d like to look at the full Federal Reserve report and estimates, please click on this link: FOMC Projections.

Right now, the best thing to do is to hold onto our current allocations and wait. Nothing that is happening is detrimental and irreversible. It’s just the markets adjusting for what the next couple of years will look like. The adjustment will help us in the long run because it’ll prevent any dramatic shocks to the market that could significantly impact your portfolio. I know it’s hard to sit tight during times like these and that patience is running low, but sometimes it’s the best course of action.