Irritable Powell Syndrome
After months of speculation, Fed chair Jerome Powell and the FOMC cut rates 50 basis points and indicated that more easing was to come. This was widely cheered by many who have been sitting on the sidelines waiting to buy a house thinking the cut by the Fed would reduce mortgages rates. I hate to be the barer of bad news (I too want to buy a new house), but mortgage rates care more about 10-year yields than the short-end of thc yield curve. In fact, if you look at rate cuts since 1974, the median change on the 30-year mortgage rate one year following the first-rate cut was -2.2%. If rates were around 6.1%, when the Fed cut in September, that equates to 30-year mortgage rate of 5.9% one year from now. I think I am just gonna have to keep saving…
Because we were inverted…
While Maverick and Goose were busy “communicating” with the enemy, the yield curve finally un-inverted in September. For perspective, the yield curve inverted in 2022, making this the longest inversion in history. Does it matter? If you are an economist yes. lf you are an actual investor, probably not. Historically speaking, investor performance is not materially affected when the yield curve uninverts – actually the median three-year price return following a dis-inversion is slightly higher than historical three-year returns. Don’t sell because you think a recession is imminent.
China to the moon?
While global equities posted a strong September, you can’t talk about the markets without talking about China. Chinese officials threw everything but the kirchen sink in a stimulus package and to say the Chinese stock market responded would be an understatement. In nine trading sessions, the Shanghai Composite rose almost 25%. Max pain for funds who were short China, or the ever increasingly popular ex-China mutual fund/ETF set (we were neither). Before everyone gers all upset about missing this trade, keep in mind that if you invested in China in 2015, you have a price return of 0% after this run up last month.
The curse is broken
September has historically been the weakest month of the year for U.S. equities. What did we do naturally? The S&P 500 returned over 2% for the month. Impressive especially when you consider that September has the worst average annual return for any month over the past 20 years (-0.7%). Add in the fact that this is the best nine-month performance in the U.S. stock market in election year in history and I would say things are humming along nicely. This leads into my last point for everyone who thinks how can this market keep going up when there is so much bad the world.
The markets don’t care about your feelings
At the risk of sounding insensitive, things that are wildly important to us as individuals, the markets often could care less about. What you perceive as important, the markets will shrug is shoulders at. It doesn’t care if you think something is unfair, bad or any other host of emotions. What the global markets care about is the business cycle and the direction global economies are headed. Can war, natural disasters etc. effect the market? Yes, but only in the short run. Unless one of these things accompanies a shock to the system, that shifts the global economy, the market will do what it always does – not caring about your feelings.