Wall Street closed a miserable September on Friday with the S&P 500’s worst monthly slippage since March 2020, when the coronavirus pandemic sent global markets tumbling.
The benchmark index ended the month with a loss of 9.3% and recorded its third consecutive quarterly decline. It is now at its lowest level since November 2020 and is down more than a quarter since the start of the year.
The main reason financial markets continue to struggle is fear of a possible recession as interest rates soar in hopes of curbing the high inflation that has swept the world.
“Quite frankly, if it’s a deep recession, you’re going to have to see more selling,” said Quincy Krosby, chief equity strategist at LPL Financial. “That’s what the market is trying to navigate now.”
The Federal Reserve has been at the forefront of the global campaign to slow economic growth and hurt labor markets just enough to reduce inflation, but not enough to cause a recession. On Friday, the Fed’s preferred measure of inflation showed that it was worse last month than economists had expected. This should allow the Fed to keep rates rising and keep them high for some time, increasing the risk that it will go too far and cause a slowdown.
Vice Chairman Lael Brainard was the latest Fed official on Friday to insist he will not cut rates prematurely.
“At this point, it’s not a question of whether we’ll have a recession, but what kind of recession it will be,” said Sean Sun, portfolio manager at Thornburg Investment Management.
In total, the S&P 500 fell 54.85 points, or 1.5%, to close at 3,585.62 on Friday, after oscillating between small losses and early gains. It has now posted a weekly loss in six of the past seven weeks.
The Dow Jones Industrial Average fell 500.10 points, or 1.7%, to 28,725.51. The Nasdaq composite slid 161.89 points, or 1.5%, to 10,575.62. The tech-focused index fell 10.5% in September and is down 32.4% so far this year.
Small company stocks also had a tough September. The Russell 2000 ended the month down 9.7%. On Friday, it was down 10.21 points, or 0.6%, at 1,664.72.
Higher interest rates reverse one of the main levers that set stock prices. The other lever also appears to be under threat as a slowing economy, high interest rates and other factors weigh on corporate earnings.
Cruise ship operator Carnival fell 23.3% for the biggest drop among S&P 500 stocks after reporting a bigger loss for its latest quarter than analysts expected and revenue below expectations. Rivals Norwegian Cruise Line and Royal Caribbean Group lost 18% and 13.2% respectively.
Nike fell 12.8%, its worst day in more than 20 years, after saying its profitability weakened over the summer due to discounts needed to clean up suddenly overcrowded warehouses. The amount of shoes and equipment in Nike’s inventory increased 44% over the previous year.
The sharp rise in the US dollar this year against other currencies has also hurt Nike. Its worldwide revenue increased by only 4%, instead of the 10% it would have if currency values had remained the same.
Nike is not the only company to see its stocks soar. The same is true for several major retailers, and such bad news for businesses could actually mean some relief for shoppers if it leads to more discounts. This echoed some glimmers of encouragement buried in Friday’s report on the Fed’s preferred inflation measure. This showed some slowing in inflation for goods, even as price gains continued to accelerate for services.
Another report released on Friday also offered a glimmer of hope. A measure of consumer sentiment showed that US expectations for future inflation declined in September. This is crucial for the Fed, as tight expectations of higher inflation can create a debilitating, self-perpetuating cycle that makes it worse.
Treasury yields first fell slightly on Friday, releasing some of the pressure that has been building up in the markets, but then rose again late in the afternoon.
The 10-year Treasury yield rose to 3.81% from 3.79% on Thursday evening. The two-year yield, which more closely tracks expectations for Fed action, fell to 4.23% from 4.19%.
Not all stocks were beaten in September. Biogen climbed 35%, but that was an outlier. FedEx was among the biggest losers in the market, ending the month down 29.6%.
In the third quarter, which included a market rally in July, Netflix was among the top performers, climbing 34.6%. It is still down 60.9% for the year.
A long list of other worries continues to hang over global markets, including growing tensions between much of Europe and Russia following the invasion of Ukraine. A controversial tax cut plan by the British government has also sent bond markets spinning recently on fears it could further worsen inflation. Bond markets only calmed down a bit after the Bank of England pledged to buy mid-week, but plenty of UK government bonds are needed to push yields lower.
The stunning and rapid rise of the US dollar against other currencies, meanwhile, increases the risk of creating so much stress that something will crack somewhere in the global markets.
Stocks around the world were mixed after a report showed inflation in the 19 countries that use the euro hit a record high and data from China indicated factory activity there had slowed weakened.