Weekly Update

The State of Markets

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Published September 29, 2023


The stock market has been experiencing a pullback as investors adjust to a “higher for longer” interest rate outlook. That change in outlook came from the Federal Reserve’s recent meeting as shown below in the “dot plot” projection by the Fed members. The dots represent each Fed member’s outlook for interest rates over the coming year. Investors look at the median of those projections for an indication of what the Fed members see on the horizon. The stronger-than-expected economy has driven a push upward in those projections from the Fed’s June meeting. And it was a significant push upward – a full +0.5% from 4.6% to 5.1%. Stocks have reacted poorly to the change in projections, dropping -5%.

YE 2024 Fed Funds

The drop in stock prices in the face of generally solid corporate earnings has brought the forward-looking price-to-earnings (P/E) ratio back down to typical levels as shown below. The challenge is that interest rates are now substantially higher than they have been over the past decade. All other things equal, higher interest rates drive lower P/E ratios. So, investors are now trying to determine what is fair value for stocks if interest rates are returning to the historically normal 5% range. And they are trying to answer this question while the economy shows unexpected signs of strength (Q3 GDP projected to be >4%). The ubiquitous recession calls from earlier in the year have now been pushed into 2024 if not abandoned altogether.

S&P 500 forward 12-month P/E ratio: 10 years

Through much of the year, the rising interest rate environment and uncertain economic growth created a situation where investors sought safety. But not in the usual places. Rising interest rates devalue dividends making the normal safe havens of defensive utility and consumer staples sectors less appealing. Investors flocked to “safe” companies with enough earnings growth to outrun the rising interest rates. These “safe” companies have been referred to in the chart below as the S&P7. They are the long-standing “FANGMA” market leaders of Apple, Microsoft, Google, Meta, Amazon with Tesla and Nvidia thrown in. You can see below that these seven companies account for almost the entire gain in the stock market this year. The other 493 companies in the S&P 500 have been flat since mid-January, held back while the above uncertainties play out.
S&P7 is up more than 50%, S&P493 is basically flat

Taking a longer view, the sharp rise in interest rates and shifting economic tides has created some major challenges from investors in the post-pandemic market. For one, bonds have been hammered, with the first chart below showing the -15% drop in the value of the major bond index over the past two years.

Bonds have been hammered

The same factors have kept investors away from rate-sensitive small cap stocks. The group has spent 18 months chopping about on a road to nowhere.

Investors stayed away from rate-sensitive small cap stocks

But that’s nothing. Emerging markets have made no progress in over FIVE YEARS!

Emerging markets have made no progress in over FIVE YEARS!


It has remained a market almost entirely driven by the tech/consumer heavyweights. The recent pullback has made but a small dent in the upward trajectory of the group as shown below.

Market is almost entirely driven by the tech/consumer heavyweights

As investors look forward, they see plenty of uncertainty. But also, a coming end to the sharp rise in interest rates sometime over the next year. If economic growth holds up while interest rates flatten, stocks should broadly be rewarded.


Market Update

Coming off their worst week in six months, stocks found a little bit of a rebound Monday. Oil prices continued their recent climb (+7% in September) while interest rates also affirmed their relentless move upward. The 10-year U.S. Treasury yield has moved from 3.5% in May to 4.6% now. Monday’s stock market rebound was a modest +0.4%. The selling in stocks returned Tuesday with a -1.5% drubbing as the rise in oil prices and interest rates continued. Amazon was sued by the Federal Trade Commission, along with 17 states, for anti-competitive practices. Wednesday brought a drop in crude oil inventories which accelerated the push higher in oil stocks. A -1% drop in stocks in the morning brought in buyers who rallied the market back to a flat finish. The buying continued Thursday with interest rates, oil prices, and the U.S. dollar all taking a pause from their rallies. Stocks closed with a +0.6% rise. Friday brought a key inflation report with data once more showing that inflation is ramping down. The CPE report showed core inflation at +0.1% with the three-month directional trend suggesting rates will hit the Fed’s long-term 2% inflation target next year. Stocks gave up early gains Friday to close lower at -0.3%. Yields fell back while consumer stock Nike popped +7% on a solid earnings report.

Stocks largely held up this week after the prior week’s breakdown. The S&P 500 fell -0.70% for the week while the Nasdaq 100 (QQQ) clawed its way back to a +0.12% result. Smallcaps rebounded +0.46%.

Warm wishes and until next week.