Market Update: September 22, 2023

Welcome to the Weekly Market Update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth, and here’s what happened in the market this week.

 

It looks like the market has started a correction over the last two months. Since last week, the market has fallen 4.2% and 5.5% since the highs set at the end of July.

In the news this week, the United Auto Workers union strike continues at the big three US auto manufacturers. The Federal Reserve held interest rates steady but the infamous Dot Plot indicates that interest rates may stay higher for longer. Speaking of higher for longer, it appears the market is finally starting to price in a new interest rate super cycle.

Here’s what I mean by that. The bond market has been through two distinct “super cycles.” The first was the post-WW2 era that saw strong economic growth and rising interest rates on the 10-year treasury shown here. As interest rates rose, bond prices fell. This time period also saw bits and spats of rising inflation. Ultimately, the 10-year treasury rate peaked in 1981 along with inflation thus beginning the next bond “super cycle.” Bond investors were rewarded with taking risk and as interest rates fell. Because bonds were in a bull market, diversified investors could find a safe haven in bonds from the higher volatility seen in stocks. This super cycle ultimately ended with a bang in March of 2020 when bond rates fell to near-zero. Here is what this chart looks like now. With the rise of inflation in 2022 commiserate with rapid interest rate hikes, the yield on the 10-year treasury broke the downward channel that had held in place for the last 40 years. This week, the 10-year treasury yield reached new highs, breaking through the highs set in October of 2022. Now, there’s no guarantee the bond market continues the trajectory seen in the post-WW2 era. But we are certainly not going to follow that downward channel that started in the 1980’s.

The implication of this new bond super cycle is pretty profound. Other assets, like stocks, need to price in higher discount rates because borrowing costs will be higher. As an example, this typically means more volatility out of growth stocks like the Nasdaq 100 shown in purple. We’ve already seen the damage rising interest rates can do to growth stocks after 2022. As interest rates rose on the 10-year (shown in blue), stock prices from the Nasdaq fell. Beginning in October of 2022, the 10-year yield essentially moved sideways for a year allowing the Nasdaq to rally again. Now that interest rates have started to increase, we’ve seen more weakness out of the Nasdaq.

This Weekly Market update is meant to be an enticing appetizer for market and economic insight. For a heartier serving, please check out our podcast, “Up and to the Right” on all your favorite podcasting apps. And for the full course meal, check out our website at signaturewmg.com. And don’t forget to like and subscribe.

 

Sources:

1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved September 22, 2023, from FactSet Database.

2.FactSet Research Systems. (n.d.). 10 Year Yield benchmark (Interactive Charts). Retrieved September 22, 2023, from FactSet Database.

FactSet Research Systems. (n.d.). 10 Year Yield benchmark & QQQ (Interactive Charts). Retrieved September 22, 2023, from FactSet Database.

 

Signature Wealth Management Group is registered as an investment adviser with the SEC. Signature Wealth only transacts business in states where it is properly registered, or is excluded or exempted from registration requirements.

 

Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the author as of the date of publication and are subject to change.

 

Information contained herein does not involve the rendering of personalized investment advice, but is limited to the dissemination of general information.

The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

The companies in the Nasdaq-100® include 100-plus of the largest domestic and international non-financial companies listed on the Nasdaq Stock Market based on market capitalization.

 

The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

Forward-looking statements are not guarantees, and they involve risks, uncertainties and assumptions. The use of words such as “will”, “may”, “could”, “should”, and “would”, as well as any other statement that necessarily depends on future events, are intended to identify forward-looking statements.

 

Information is not an offer to buy or sell, or a solicitation of any offer to buy or sell the securities mentioned herein.

The S&P U.S. Style Indices measure the performance of U.S. equities fully or partially categorized as either growth or value stocks, as determined by Style Scores for each security. The Style series is weighted by float-adjusted market capitalization (FMC), and the Pure Style index series is weighted by Style Score subject to the rules described in Index Construction.

All information presented prior to an index’s Launch Date is hypothetical (back-tested), not actual performance. The Index returns shown do not represent the results of actual trading of investable assets/securities. S&P Dow Jones Indices LLC maintains the Index and calculates the Index levels and performance shown or discussed, but does not manage actual assets. Please refer to the methodology paper for the Index, available at www.spdji.com for more details about the index, including the manner in which it is rebalanced, the timing of such rebalancing, criteria for additions and deletions, as well as all index calculations.