October 2023 Market Perspective
Stocks continued their slide in the 3rd quarter, with all three major indices in the red for the month of September and for the quarter. Reversing early gains in the first half of the year, the Nasdaq fell 5.81% in September and the Dow and S&P 500 declined 3.42% and 4.8%, respectively. For the 3rd quarter of 2023, all three indices posted negative performance with the Nasdaq dropping 4.12%, the S&P 500 down 3.27%, and the Dow declining 2.10%.
As we have seen throughout the year, the market continues to be dominated by a handful of stocks, known as the “Magnificent Seven.” Through the end of September, the S&P 500 is up 13.07%, with the Magnificent Seven accounting for 11% of that YTD performance. For the 3rd quarter, only 4 of the seven beat the S&P 500, with only 3 of those stocks posting gains. Additionally, 249 stocks in the S&P 500 have posted negative YTD performance through September. A clearer picture of the state of the market can be seen in the S&P 500 Equal Weight Index (EWI). The S&P 500 is a capitalization-weighted index, meaning each component of the index is weighted according to its market capitalization (number of outstanding shares multiplied by the current market value per share). Therefore, components that have a higher market capitalization will have more influence because they constitute a higher percentage of the index. By the end of last quarter, the Magnificent Seven comprised 25.23% of the S&P 500. Alternatively, the S&P 500 EWI includes the same component companies as the S&P 500, however each company is allocated the same, fixed weight, 0.2%, of the index. While the S&P 500 is up 13.07% YTD (through 9/30), the S&P 500 EWI is up only 1.79%. This demonstrates the market has narrow breadth, or more simply, the market performance has been concentrated around the top 7 stocks.
The markets continue to be dominated by news related to inflation, the Federal Reserve (Fed), interest rates, and oil prices. CPI increased 0.4% for the month September and 3.7% year-over-year, which came in close to Dow Jones estimates of 0.3% and 3.6%, respectively. Core CPI, excluding volatile food and energy prices, rose 0.3% for September and 4.1% from a year ago, both in line with analyst expectations. For September, shelter costs were the major contributor to the increase in inflation. The index for shelter, which accounts for approximately one-third of the CPI weighting, rose 0.6% for the month and 7.2% from last year. Energy costs also rose 1.5% for the month.
Rising Treasury yields have also weighed on stocks, hitting 16-year highs in the month of September. Multiple Fed officials have indicated that rising yields could cause the Fed to conclude its rate hiking cycle. Currently, the market is pricing in a pause at the conclusion of the Fed’s Oct 31 – Nov 1 meeting. There is a slightly higher probability of a rate hike during the Dec meeting, however that will be determined by incoming economic data, including CPI, jobs, and unemployment.
In July, Saudi Arabia and OPEC announced a voluntary oil production cut. Then in September, Saudi Arabia announced it would extend cuts through December and OPEC+ countries would extend their cuts through 2024. This caused oil to breach $90/barrel for the first time in 10 months. These cuts, along with domestic production cuts, will likely continue to drive the price of oil upward. In its recently released outlook, the U.S. Energy Information Administration (EIA) forecasts the price of oil to increase almost 6% in the 4th quarter, increasing from $88/barrel in August to $93/barrel in December.
Another factor that could potentially affect oil, and thus gas, prices is the ongoing Israel-Hamas war. Experts warn that an impact on oil process depends largely on how the war progresses, the duration of the war, and if the fighting spreads to nearby major oil-producing countries.