September Swoon

"Courage taught me no matter how bad a crisis gets ... any sound investment will eventually pay off." — Carlos Slim Helu.

September is not typically a great month for investors, with the S&P 500 declining by roughly 1% on average. This September brought a decline of more than 9%, the weakest September since 2002, when the market dropped by 11%.

Overall, the markets had a turbulent week that concluded the third quarter with a third consecutive weekly loss. Investors went through a plethora of economic data indicating that personal income met expectations and expenditure doubled estimates, while inflation readings were slightly higher than anticipated.

On the August CPI data release, the S&P 500 fell 4.5%, marking its most significant single-session drop since June 2020.

What Happened in September?

As consumer price indices have climbed close to 40-year highs, inflation has acted as a cloud over the markets for the whole year. The Federal Reserve has already expressed its intention to continue to increase interest rates unless it sees "clear and persistent" evidence that inflation is declining. Hence, the Fed would likely need three to four consecutive declines in inflation before suspending its rate-hiking program.

Without a doubt, September was a very turbulent month for the indices, with the S&P 500 losing 9.3% and recording its most considerable monthly decrease since March 2020. The Nasdaq fell 10.5%, with tech firms bearing the brunt, as bond rates soared over the month.?

Moreover, it is clear that the Dow entered the bear market territory, and the S&P 500 plunged to depths not seen since 2020, while the sustained downturn in Tech sectors brought the Nasdaq's year-to-date loss above 30%. To quell persisting inflationary pressures, the measures were taken amidst lingering unease over the aggressive global monetary policy direction,

The FED is in a particularly complicated situation, where the primary tools they have at their disposal to fight inflation would also contribute to an economic slowdown.

When Will the Decline Stop?

While the economy may weaken in the coming months, historical data indicates markets tend to be forward-looking and may begin to rebound even as economic, and earnings indicators continue to drop.

Since 1935, whenever the S&P has dropped by more than 20% in a single calendar year, the returns in the year that follows are positive, and by an average of roughly 25%. Therefore, this market bottoming out may also present an opportunity for long-term investors to either diversify their holdings, rebalance their portfolios, or put new capital to work in high-quality investments at potentially better prices, all in anticipation of a presumably sturdy recovery.

Inflation Decreasing

As consumer price indices have climbed close to 40-year highs, inflation has been a burden on markets for the whole year. When determining monetary policy, the Fed and central banks throughout the globe now prioritize lowering inflation as their top objective. The Federal Reserve has already indicated that it would continue to increase interest rates unless it sees "clear and persistent" evidence that inflation is declining. This suggests that the Fed would likely need three to four consecutive declines in inflation before suspending its rate-hiking program. ?

US Dollar Slowing Down

The US dollar has been rising throughout the year, with the DXY dollar index up roughly 17% this year and 25% since early 2021. Several variables have contributed to this shift, including the relative rate movements of the Federal Reserve against foreign central banks and the greater stability of the US economy. The dollar also tends to be a safe-haven currency for investors, particularly during periods of slowing the global economy. If the US currency stabilizes and then declines, which might occur before the Federal Reserve's rate-hiking cycle ends, this would improve financial circumstances and facilitate a possible market rebound.

A strong dollar is a double-edged sword for the economy. It's great for businesses that import their goods from overseas, as they can now do so for relatively less.

But, it has the opposite effect on US businesses reliant on exports. These exported goods are now relatively more expensive for those outside the US, causing demand to fall, and leading to increased unemployment and layoffs in these sectors.

Bond yields stabilizing and eventually declining - Since the 2008-2009 Great Financial Crisis, bond yields have been reasonably restricted and, in some circumstances, even approached zero. In the decade before 2022, the average yield on 10-year US Treasuries was around 2%. This had bolstered financial markets, particularly equities since investors and companies could borrow at cheaper rates, had enough liquidity, and were compensated for taking on risk.?

What to Do Next?

Even the most seasoned investor may be shaken to their core when they see the value of their holdings rapidly deteriorate. However, these market downturns are a normal and expected part of the game of investing.

When there is a bear market, it is not a good time to make short-term investments in the market. Do not forget that investing in the stock market for an extended period of time is one of the greatest methods to safeguard your money in a bear market. This is particularly true if you do not need to liquidate your investments in the near future.

This is why I continue hammering the simple concept of long-term growth, diversification, and dollar cost averaging into the market. This is the most tried and true method of building wealth over time.

What is Ahead for October?

There is plenty to look forward to in the months ahead for growth-oriented investors as there will be plenty of reports and data to go through, which could signal the beginning of the end of this bear market.

Earnings season begins in just a few weeks, with public companies revealing their Q3 results, which will set a precedent for the rest of the year, and hopefully signal the start of this recovery.

From an earnings perspective, October should be rather revealing. In the following weeks, quarterly earnings reports from firms will be significant. Investors will likely concentrate less on historical performance and more on what corporations have to say about their vision for the remainder of the year and the year ahead.

Navigating these turbulent times by yourself can quickly become overwhelming. If you wish to re-evaluate your investment strategy or prepare for what might come in the following months, please don't hesitate to reach out to me!

Luke