3rd Quarter – Good Riddance

 

Sayonara:

Since early 2022, stocks have been getting repriced on valuation alongside rising real interest rates which rose again last week. Markets continued their September selloff last week with hawkish Fed talk and disappointing earnings pressuring yields higher and stocks lower. In the equity market, almost all the drawdown to date has been valuation-driven, with the forward price-to-earnings multiple on the S&P 500 falling almost step-for-step with the rise in real interest yields.

Friday closed at the lowest levels of the year, wrapping up a third straight quarterly loss that has taken the S&P 500 down 25% this year. But all is not lost. Please see the next table from Ben Carlson on historic forward returns post these types of selloffs. (Scroll down and click on the link to read the full analysis). No guarantees of course, but in investing (not trading) your highest incremental percentage S&P returns have historically come during economic slowdowns and recessions. As Josh Brown, “The Reformed Broker”, notes in his recent writing.

All bear markets have two things in common:

1. They eventually end.

2. Expected returns go up.

The United Kingdom:

Last week, a crisis broke out in U.K financial markets as accelerating higher interest rates caused margin calls over some esoteric financial instruments used by London-defined benefit pension plans. “LDI” – liability-driven instruments, caused forced to selling in bonds, in turn driving down prices and sending the value of pension funds’ assets below liabilities. The Bank of England was forced to step in and support prices. Think of our Fed restarting QE or quantitative easing here in the states.

• The UK central bank did this to allow funds time to manage the sale of these assets.
• Many of those forced sales in both stocks and bonds hit the markets last Thursday and Friday.
• The near linear drop in the S&P500 on Friday afternoon was mainly likely attributable to these margin sale programs when the US markets were the only open markets in the world.
• $7 billion in S&P500 stocks were for sale at the close of Friday. That’s a margin call forced sale.

 

Stock Talk Podcast: The Fed is “Real”ly hurting Risk Assets:

News or Noise: Higher Interest Rate Speed Kills:

 

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