Market Update - September 2023

Market Update - September 2023

October 01, 2023


Despite the markets' pullback during the month and quarter, the economic data was largely positive in September. The continued strength of the labor market helped support consumer income and spending growth. Additionally, business spending remained strong, and progress was seen in combating inflation.


A September Sell-off Ends a Challenging Quarter
Rising rates and concerns surrounding a potential government shutdown at month-end weighed on equities. Equity markets fell in September for the second consecutive month, causing all three major U.S. indices to end the month and quarter in the red. The S&P 500, Dow Jones Industrial Average (DJIA), and the Nasdaq Composite all lost, with the Nasdaq Composite seeing the most significant declines. The S&P 500 and Nasdaq Composite finished the month above their 200-day moving averages (a widely followed technical signal; prolonged breaks above or below this level can be a proxy for shifting investor sentiment). In contrast, the DJIA finished the month below trend, marking the first time any of the three major U.S. indices has ended a month below this year. While a month below-trend is not an immediate concern for investors, technical factors will be worth monitoring in the months ahead.

Earnings reports showed signs of better-than-expected fundamental performance throughout the quarter. Per Bloomberg Intelligence, as of September 14, 2023, the blended earnings decline for the S&P 500 in the second quarter had a notably better result than the decline expected at the start of earnings season. Fundamentals drive long-term performance, so the smaller-than-anticipated decline was a positive development for markets.

International markets also experienced declines during the month and quarter. The MSCI EAFE Index and the MSCI Emerging Markets Index were down for the month and quarter. Both international indices ended the month below their 200-day moving averages, marking the first time they finished a month below trend this year.

Fixed Income Falters as Rates Rise
Fixed-income markets also experienced declines in September, as rising interest rates weighed on bond prices. The Bloomberg Aggregate Bond Index lost for the month and quarter. High-yield fixed income (the Bloomberg U.S. Corporate High Yield Index) also experienced declines in September; however, despite the monthly decline, the index managed to eke out a small gain for the quarter. High-yield bond spreads rose at the end of the month, signaling increasing investor caution.

The Federal Reserve
The Federal Reserve (Fed) kept the federal funds rate unchanged at its September meeting. Still, Fed Chair Jerome Powell indicated in his post-meeting press conference that the Fed might hike rates further this year and keep them higher for longer, if necessary, to combat inflation. While this echoes previous messages from the central bank, rising investor expectations for tighter monetary policy helped drive yields up in September.

Economic Growth Continued
The August job report showed solid job growth, with the labor force participation rate rising to a three-year high for the month while the unemployment rate remained low. The healthy labor market supported personal income and spending growth in August and better-than-expected retail sales growth. While consumer confidence fell during the month, spending has stayed resilient throughout the year despite the shifting sentiment.

Business spending also showed signs of improvement in September. Headline and core durable goods orders increased more than expected, marking four consecutive months with rising business investment. Business confidence also improved, with both manufacturer and service sector confidence increasing more than expected.

Improved Inflation Data
While headline consumer inflation accelerated in August due to rising food and energy costs, core inflation continued to fall. While work is still needed to get inflation back to the Fed's 2% target, the improvements seen this year indicate progress in the right direction in the fight against inflation.

Potential Market Risks
Several political and economic risks have impacted markets throughout the year, and September's government shutdown saga was another reminder that real risks remain for investors. After a month of political uncertainty, Congress was able to avert a government shutdown by passing a stopgap funding bill. While the measure will keep the federal government open through mid-November, allowing for further budget negotiations, this situation may continue to be a source of uncertainty and potential risk for investors.

Domestically, inflation is a risk, as a spike in prices could lead to additional rate hikes. While economists and investors do not anticipate a surge in inflation, the Fed will remain data-dependent at upcoming meetings, and rate hikes are possible if we see signs that inflation is accelerating. As we saw in September, rising rates can pressure stock and bond valuations.

Internationally, the Russian invasion of Ukraine and continued economic uncertainty from China represent two of the most prominent current risk factors.

Finally, there are always unknown risks that can't be predicted at this time, which always have the potential to impact markets negatively.

A Solid Foundation for the Fourth Quarter
The continued strength of the labor market should support ongoing consumer income and spending growth through the end of the year. Additionally, business spending is set to remain solid, and further progress is expected to combat inflation. Therefore, the fundamentals are in place for a positive end of the year, especially if we don't see any further rate hikes by year-end.

While the most likely path forward is a return to market appreciation and continued economic growth, some risks remain that could lead to short-term volatility. As always, a well-diversified portfolio that matches investor timelines and goals remains the best path forward for most.

Please do not hesitate to contact our office if you have questions or want to check-in. We are happy to walk you through our approach and explain what we are doing to keep you on track to meet your financial goals and needs. We look forward to hearing from you and hope you have a wonderful week.



Charles D. Dodds, Jr., CFP®, CLU®, ChFC®, CIMA®
President, Sr. Portfolio Manager

Adrian F. Dodds, CFP®
Managing Partner, Sr. Financial Advisor