September is closing out with a bug giant THUD! Wall Street is currently wading through what’s considered the worst seasonal period of the year. Goldman Sachs’ Scott Rubner (Economic Strategist) noted Friday that, since 1928, the median return in the S&P 500 for the last 10 out of 11 days in September was negative. Since mid-August, we have seen a steady downward trend to most of the stock market sectors. I believe a lot of the perceived negative sentiment has been centered around interest rate uncertainty and the realization that “higher rates for longer” is the new path forward. What that could mean for investors, however, is that the financial markets could be setting themselves up for a year-end rally, especially if the Fed does follow through and end the current cycle of rate hikes.
One of the Fed’s favorite inflation indicators, the PCE Index (Personal Consumption Expenditures), rose less than expected in August. Excluding food and energy, the index only increased 0.1%, lower than the expected number of 0.2%. Overall spending rose 0.4%, down sharply from the July number of 0.9%. I believe this is helping to further illustrate that the central bank’s fight against higher prices continues to make progress. Why does the Fed favor the PCE data over some of the others they use in their analysis of economic health? The PCE accounts for shifts in consumer behavior like substituting lower-priced goods for more expensive items therefore a better “cost of living” picture. Core PCE, including food and energy expenditures, was +3.9% year over year, the first sub 4% reading in nearly two years. While the Fed may still be targeting an inflation rate of 2% and the road to achieving that still seems long and winding, the hazards along the way are diminishing.
The next 24 hours or so should be interesting as the Washington political wheeling and dealing machine shifts into high gear. With the current debt ceiling set to expire at 12:01am on Sunday, the government shut down talks could be turning into reality. The ongoing showdown between the Senate and House is going to hit us front and center. There is discussion of funding a short-term “stop gap” bill for 30 days to provide the funding needed to keep things operating as normal. But the posturing by both parties for a longer-term resolution is a real challenge in the current political climate. There is no doubt that the debt levels in this country have gotten out of hand and with interest rates where they are today, the cost to service that debt will only grow. The real impact will be felt by our federal workers who depend on their incomes. According to the Washington Post, about 800,000 employees were affected by the 2018-2019 shutdown, about 380,000 of those workers were furloughed while the rest worked without pay. When things returned to normal, backpay was issued but that still made the time without pay difficult for many. If there was ever a time for the real leaders to step up and take charge, now would be that opportunity.
I realize the “tone” of this week’s letter might seem a little more negative than those in the past, but that is the nature of the business sometimes. I wish it were different, but it’s where we sit right now. Right now, being the operative term. We have been here before, many times in fact. That’s okay, we persevere. We put our heads down and get to work. Opportunities are created, we step up to the plate, and we move forward. I do believe Washington will get this sorted out with many deals made on the side. It will be a distraction for sure, but not a long lasting one. Our financial markets will take this in stride like they have done in the past. As we move into October, and the weather cools down, I believe we will see a move back higher. History has shown this to be the case, especially in an election year.
Food for thought: There have been 23 elections since the S&P 500 Index began. The Index provided positive performance in 19 of those 23 years or 83% of the time.
Have a nice weekend!
Christopher E. Wasson, CFP®
Mosaic Asset Partners, LLC
1122 Kenilworth Drive, Suite 310
Towson, MD 21204
410.821.0089 fax 410.821.5993
Securities offered through Kestra Investment Services, LLC (Kestra IS), member FINRA/SIPC. Investment advisory services offered through Kestra Advisory Services, LLC (Kestra AS), an affiliate of Kestra IS. Mosaic Asset Partners, LLC is not affiliated with Kestra IS or Kestra AS. Investor Disclosures: https://www.kestrafinancial.com/disclosures
The opinions expressed in this commentary are those of the author and may not necessarily reflect those held by Kestra IS or Kestra AS. The material is for informational purposes only. It represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. It is not guaranteed by Kestra IS or Kestra AS for accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.