Best-performing S&P 500 sectors in Q3

Energy: +11.3%
Communication services: +2.8%
Financials: -1.6%
 

Weakest-performing S&P 500 sectors in Q3

Utilities: -10.1%
Real estate: -9.7%
Staples: -6.6%

*Past performance is no guarantee of future results.

Quarterly Market Headlines

• Equities sagged in September to cap a challenging quarter, as interest rate sensitive sectors including utilities and real estate led declines. Energy stocks were a bright spot during a quarter in which 9 of 11 S&P 500 sectors fell.
• Technology and growth stocks, the biggest winners in the first half of 2023, retreated modestly in the third quarter. Concerns about further growth prospects in a slowing economy and relatively high valuations after hefty price gains year-to-date dampened enthusiasm for these sectors. The tech-heavy NASDAQ Composite lost 4.1% in the quarter. International indices were mixed, with London’s FTSE 100 Index up 1.0%, whereas the European Stoxx 600 Index lost 2.5% and Japan’s Nikkei 225 Index gave back 4.0%.
• Utilities and real estate suffered most during the quarter, each shedding roughly 10% as a sharp rise in interest rates diminished investors’ appeal for sectors that typically pay higher dividends. Ongoing concerns about return-to-office and the impacts of higher residential mortgage rates also dampened investor interest in the real estate sector.
• Longer-dated Treasury yields rose substantially during the quarter, adding pressure to stock valuations. While 2-year Treasury yields drifted upwards slightly to close above 5%, the 10-year Treasury yield climbed nearly 75 basis points (0.75%), reaching its highest level since 2007 as the Federal Reserve signaled it would keep interest rates higher for longer amid signs of persistent economic growth. The 10-year yield is indicative of longer-term consumer and business borrowing costs, which have continued to rise.

Federal Reserve

• At its July meeting, the Federal Reserve instituted a 25-basis point (0.25%) interest rate increase, bringing the target range for the federal funds rate to 5.25-5.50%. The Fed held its policy range steady at the September meeting. Pricing of federal funds futures contracts indicates the market expects the Fed to leave the policy range for the federal funds rate unchanged at the November meeting, though some Fed board members have suggested an additional rate hike may be necessary in November or December.

Inflation, Labor, and Economic Conditions

• Inflation has moderated significantly from 2022 highs, but continues to track well above the Fed’s 2% annual target. The most recent consumer price index (CPI) pegged the annual rate at 3.7% while the personal consumption expenditures (PCE) price index registered 3.5%. The core measures of CPI and PCE, which strip out food and energy, clocked in at 4.3% and 3.9%, respectively. Longer-term inflation expectations—watched closely by the Fed—have remained in the 2-3% range and have drifted towards the lower end of that range in recent months.
• Complicating the inflation picture, WTI crude oil (the U.S. benchmark price) rose more than 20% during the quarter. Many observers highlight the need to rebuild low oil inventories, as well as increased demand from China and India, as drivers of the sharp price rise. Further, Saudi Arabia announced in July that it would cut daily production by 1 million barrels.
• Labor conditions remain robust. Payroll employment rose by 336,000 in September and nearly 800,000 over the quarter, substantially more job growth than in the second quarter and well above market expectations. Other signs of labor market tightness persisted, as initial and continuing jobless claims have trended lower in recent months and job openings jumped by nearly 700,000 in August.
• In mid-September the United Auto Workers (UAW) initiated a series of strikes at facilities owned and operated by the 3 major U.S. automakers. Citing insufficient progress on new contract talks, the UAW expanded the strikes and as of early October a total of 25,000 workers were now striking. Additional workers were furloughed due to lack of parts caused by strikes along the companies’ supply chains. By some accounts, the strike has already caused $4 billion in lost economic output (including the impacts on outside vendors and suppliers).
• Second-quarter real GDP measured 2.1%, only slightly below the first quarter’s 2.2%. Spending and retail sales data continued to point to consumer resilience in the face of rising prices and interest rates. Overall services sector data remained firmly in positive territory. Manufacturing continued to lag, though readings at the end of the quarter were stronger than expected. Consensus forecasts for Q3 GDP have been rising.
• Approximately 44 million borrowers are required to resume repaying student loans in October, which could create headwinds for consumer spending, a major driver of U.S. economic activity.
• During the third quarter, the Federal Reserve reported that aggregate credit card balances passed the $1 trillion mark for the first time. Although delinquencies have been rising recently, the percentage of such past due revolving credit remains lower than during the Great Financial Crisis of 2008-09.
• Though unable to reach consensus on a federal budget for fiscal year 2024 (which began on October 1), Congress hammered out a continuing resolution (CR) to avoid a government shutdown. The CR funds the government through November 17 to allow Congress additional time to negotiate full-year spending details. On October 3, the process grew more complicated when the House voted to remove Speaker Kevin McCarthy, necessitating a new election for Speaker of the House. Credit rating agencies have again raised concerns about how political turbulence could affect U.S. government debt.

Looking Ahead

• While the future path of the economy and markets is uncertain, we’re here to help. Speak with a financial professional about how to stay focused on your long-term goals through any market conditions.

_{This commentary is being provided for general informational purposes only. The information does not represent investment advice or a recommendation and/or solicitation of any financial transaction.}

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