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Market Breakdown for the week.

Hope you are all doing well. The S&P 500 retreated for the fourth week in a row, slipping to its lowest level in nearly four months. The index fell less than 1% for the week, outperforming the Dow, while the NASDAQ was very volatile but managed to post a fractional gain.  Michael Gambon passed away this week.  I have broken down this week’s update using quotes from his most famous role,  Professor Dumbledore in Harry Potter.

We must try not to sink beneath our anguish … but battle on.

As bad as this month was for stocks, the S&P 500 fell nearly 5% in September, the best thing to do is to remain invested.  Declining for the second month in a row has eroded much of the stock market’s year-to-date gains. At Friday’s close, the index was down almost 7% from its July 31 peak.  The losses in September capped off an overall 3% drop for the S&P 500 for the third quarter, the first quarterly loss in a year.  There is reason for hope. It is likely the market gets better from here, as weak third quarters have often been followed by a strong fourth quarter. Since 1990, in the 11 years when stocks fell in the third quarter, the S&P 500 rebounded with a gain in the fourth quarter nine times, averaging an impressive return of 10.6% in the final three months of the year. Small-cap stocks did even better in those years, averaging an 11.4% gain for the final quarter.  In only 2000 and 2008 did the market fall in both the third and fourth quarters.

Numbing the pain for a while will make it worse when you finally feel it

Kicking the can down the road remains the theme in DC.  The Senate passed a last-minute spending bill Saturday night averting a government shutdown that would have had a short term impact on the economy. The bill allows the government to stay open for 45 days, giving the House and Senate more time to finish their funding legislation. Investors braced throughout the week for the prospect of a potential U.S. government shutdown as Congress struggled before a weekend deadline to find consensus on a supplemental spending plan.  However the Senate was able to get it done just under the wire. They voted to pass the continuing resolution 3 hours before a 12:01 a.m. shutdown of the federal government would have taken effect.

The prospect of a shutdown drove up yields. U.S. Treasury bonds exhibited elevated volatility, fueling another weekly increase for yields of long-term debt. With the notable exception of 2-year Treasuries, yields of most categories of government bonds extended their recent climb, with the 10-year Treasury yield rising above 4.50% for the first time since October 2007. Similarly, the 30-year yield eclipsed 4.70%, the highest since February 2011.  The elevation in long term interest rates is bad news for home buyers.  The average U.S. mortgage rate climbed to the highest level in 23 years by one measure, and sales of new homes fell short of expectations. The government reported that new home sales fell 8.7% in August relative to July.

Fight and fight again, and keep fighting, for only then can evil be kept at bay though never quite eradicated

Inflation is the market’s Voldemort.  It seems like the fighting the Fed has been doing is finally keeping inflation at bay.  We got some good news on inflation and it spurred a relief rally later in the week. The U.S. Federal Reserve’s preferred gauge for tracking inflation rose at the slowest monthly pace since November 2020. The Personal Consumption Expenditures Price Index rose at a 3.9% annual rate in August, excluding volatile food and energy prices. With those categories included, inflation was a more modest 3.5%.  The current rate is still well above the Fed’s target of 2% but if it continues to trend in the right direction expect stocks to be the beneficiary.

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