Stock and Bond Markets Down Sharply on Fed Comments

The Dow (-1.9%), NASDAQ (-3.6%), and S&P 500 (-2.9%) each fell sharply for the week, retreating for the third week in a row.  Similarly, taxable and tax-free municipal bonds were also down about 0.5% and 1%, respectively.  The 10-year Treasury yield climbed 0.10%, finishing the week at 4.44%.  Last week’s yield reached the highest since November 2007, immediately prior to the Great Recession of 2008.  Note that we are not suggesting that this yield is predicting a sharp recession, but demonstrating how long that Treasury yields and overall interest rates have been very low.  Similarly, 30-year mortgage rates reached a 23-year high, as some lenders eclipsed the 8% level.  Yikes!

Last week’s market movements were driven by the Fed re-iterated that they intend to keep interest rates higher for longer in their quest to bring inflation down to their target goal of 2%.  In their meeting last week, the Fed kept interest rates the same, but 12 of the 19 Fed committee members favored an additional rate hike before the end of the year.  The Fed also suggested that there would be fewer rate cuts in 2024 than expected by investors.  Of course, this was met very unfavorably by investors, taking both the stock and bond markets down sharply.  Also last week, Leading Economic Indicators (LEIs) were reported the 17th consecutive months of declines.  As per the Conference Board, “With August’s decline, the US Leading Economic Index has now fallen for nearly a year and a half straight, indicating the economy is heading into a challenging growth period and possible recession over the next year.”

September has historically been the weakest month of the year, and we are finding the same this year as well.  Thus far, the stock market indices are down 2% - 6% for the month, and 1% - 4% for the third quarter.  In similar fashion, bonds are down almost 2% for September and 3% for the quarter, and bringing bonds into negative territory for 2023.  The markets are continuing to respond to the inflation concerns in the US.

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