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Greenday knew what they were talking about when they said “Wake me up when September ends”. All three of the major indexes lost over 8.5% in September.
Every week in this month felt sad and desperate for the markets, and this final week was no different. The concerns were rooted in concerns of rising interest rates, extreme volatility across all financial markets, and, of course, worries of a recession.
Since the beginning of the rising rate environment, economists (myself included) have been worried that rising rates too fast could cause a financial accident that could have systemic implications. That worry was given some credence on Wednesday when the Bank of England stepped in to buy UK government bonds in order to restore market conditions. This move was caused by pension funds running into issues with derivative positions leading to margin calls and forced selling.
The Bank of England was set to begin selling gilts next week. They were forced to delay that effort and instead will pursue a temporary buyout of UK government bonds through October 14th.
The stock market had a brief rally on Wednesday (more like a bounce) following the decision. The S&P jumped nearly 2% and the 10 year note moved 25 basis points down. These efforts also helped the British pound to find some support after hitting a record low against the USD. The rally was short-lived as Prime Minister Liz Truss said that she will stick to her tax cut plan, the news that was the original source of the selling of gilts and the pound last week.
This week also showed notable weakness in Apple $APPL. It dropped 8.1% this week, attributed to worries about demand for the new iPhone. Apple was downgraded by BofA to neutral on Thursday given concerns of negative estimate revisions caused by weaker consumer demand. Apple’s weakness of course spilled over into the mega-cap sector.
Apple’s faltering performance also affected investor sentiment and contributed to the S&P breaking down to new lows for the year. Nike $NKE, also contributed with a 12.8% drop caused by 44% YoY excess in inventory. Rent-A-Center $RCII also gave an earnings warning that added to the market’s list of ailments.
The Fed also didn’t help the market this week as Fed officials had full docket of press time this week and reemphasized the need to keep raising interest rates to control inflation. Fed President Mester had the most concerning remark, saying that the policy rates are not yet at a restrictive level. The ECB is expected to give a 75 bp hike at its October meeting on account of the 10% YoY CPI increase in the eurozone.
The CPI reading on Friday and the PCE Price Index for August was out on Friday. The PCE showed 0.2% decrease, however the core PCE showed a 0.2% increased. This, coupled with a surprisingly low initial jobless claims reading on Thursday makes a good case for continued rate hikes by the Fed.
Geopolitically, this was also a rough week. Putin announced the annexation of four Ukraine regions on Friday. This move is not recognized by Ukraine and most other countries. However, if Putin now recognizes these regions as his, continued conflict in those areas could cause quick escalations in violence and military actions.
It was a pretty tough week in many ways, luckily the data release schedule for next week is pretty slim as far as the US is concerned. Australia’s and New Zealand’s rate decision will be important to watch, rate hikes are expected.
As I said last week, with inflation staying stubborn and the negative effects of the last four interest rate hikes finally starting to materialize, it’s becoming more likely that the Fed stays aggressive with their rate path throughout the end of the year. It’s also becoming more likely that this “soft landing” that the Fed keeps talking about does not happen. Next week may be flatter or less volatile than this week, but I still expect to see some red.
Throughout all the red this week, I took advantage of the discounts with some buys in Realty Income ($O), Intel ($INTC), and a few others you can read about in the portfolio update here. Use that update to help you put together a shopping list of some solid dividend stocks to pick up for the long term.