September was a challenging month for stocks as the S&P 500 pulled back almost 5%, while the 10 Year Treasury Yield rallied over 4.6% its highest level since 2007.  The increase in rates was likely driven by the September Fed meeting where the Fed held rates steady, but hinted that we could see another hike before the end of the year. (YCharts)

While volatility can be uncomfortable, we believe that this type of market pull-back is normal and healthy, particularly after a prolonged move higher.  From the lows in October, 2022 to the end of July the S&P 500 had rallied almost 30%.  (YCharts)

We may continue to see more volatility in the short-term but we believe that the recent market move is likely not the beginning of a longer-term downtrend as the underlying trend of the market continues to be positive. As such, we expect to see stocks move higher over the next 9-12 months. 

Coming into August the S&P 500 had been strong, up almost 20% for the year; however, August brought with it a little weakness as stocks took a breather and the S&P 500 closed down about 1.6% for the month. (YCharts) We believe that this type of volatility is normal and healthy for stocks, particularly after a prolonged move higher. 

One potential factor that impacted markets was a jump in interest rates.  The 10 Year US Treasury Yield jumped, peaking at a 15 year high of 4.35%, before closing the month at 4.09%. (YCharts)  Higher rates have the potential to be a headwind as borrowing costs may increase. 

This is something we’ll keep a close eye on.  Below, we’ll outline a few factors that could impact interest rates for the rest of the year:

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Introduction

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The second half of the year began on a positive note with the S&P 500 rallying about 3% in July and is now up over 19% for the year.  At one-point last month the Dow Jones Industrial Average was up 13 consecutive days – the longest winning streak since 1987. (YCharts)

These returns have been driven by solid economic data (including better than expected inflation readings) and an optimism that the Fed’s hike last week could be the final one of this cycle.  This month we’re going to review three indicators from our dashboard that have been impacted by the recent strength in stocks:

Another six months have flown by as we reach the halfway mark of the year with strong stock market returns.  The S&P 500 is up almost 16% YTD, after rallying 6% in June.  (YCharts)

At the beginning of the year, we highlighted a number of areas we thought were important to watch in our annual outlook.  We’re going to revisit four of these themes and provide an update on each.

• Inflation:  For the second year in a row CPI (Consumer Price Index) may be the most closely watched data point.  The most recent reading dropped to 4%, the lowest rate in 2 years, and substantially lower than the peak of 9%.  If we see inflation continue to trend downward it would likely be a positive for markets.  (YCharts)