Equity Overview

Ten of eleven sectors in the S&P 500 declined in September, with energy the only gainer and real estate the worst loser.  (Mortgage rates rose to a new 23-year high of 7.41% and pending home sales were down 18.7% year-over-year).  Counterintuitively, volatility was low as the S&P 500 moved more than 1% on only 3 of 20 trading days.  Value and growth stocks were hit about equally.   The 12-month forward price/earnings ratio for the S&P 500 declined to 18, below the 5-year average of 18.7, indicating that stock valuations are reasonable.

Macro Overview

The threatened shutdown of the federal government dominated economic headlines in September, with disaster narrowly avoided through a temporary spending deal which put off a reckoning until November 17.

On the inflation front the glass was half empty or half full, depending on your perspective.  The consumer price index rose to 3.7% year-over-year, up from 3.2% the previous month.  However, the year-over year increase in the core CPI (excluding food and energy) was its smallest in nearly two years.

Similarly, the employment landscape was both cautionary and encouraging.  Job growth declined to 187,000, below the recent average of 200,000 per month.  And unemployment rose from 3.5% to 3.8%.  But the increase in unemployment was entirely caused by more people looking for work (“labor force participation”), which is a sign of an improving economy.  Speaking of the economy, recession fears seem to be subsiding.  Goldman Sachs, which issues regular estimates of the likelihood of a recession, reduced its odds from 20% to 15%.

The Fed kept interest rates unchanged but indicated that it may raise rates once more this year.  Although not widely reported, the Fed has made significant progress in reducing its balance sheet (“quantitative tightening”), having reduced its bond holdings by $815-billion since June 2022.