Abysmal September for Stocks: Interest Rates & Apple Woes Take Toll - October Allocation

October 02, 2023

Happy October and to a continuing resolution (and the official beginning of the MLB postseason!) Most of us can all breathe a sigh of relief that our paychecks will continue to be processed on time, at least until mid-November.  We can’t be happy about the performance of the stock market this month.  In a word, it was abysmal.  September is typically the worst month of the year and this September lived up to the negative hype.

One of the key factors behind the negative stock prices this month is bonds and their yields. 

For my long-term readers, you know where I stand on the Federal Reserve.  For those not well versed in my opinions, I think they play a valuable role in trying to smooth out the economy, but they are human and can only make decisions based on the data they have.  It is an amazing construct that is only just over 100 years old. The US government puts great power into people not elected by the population to drive our monetary policy, impacting much of our daily lives.  I do believe they have steered us wrong at several points, most recently with the very low interest rates for so long, but we also saw tremendous growth in personal wealth over the past decade. 

While finance and the economy are not zero-sum games, as some think, there is still a measure of give and take.  In an effort to put some “reserve” back into the monetary system and curb inflation, they have had to hike interest rates quite significantly over a relatively short period of time.  In doing so, investors are redirecting investment dollars into bonds versus stocks, reducing demand for stocks and increasing bond yields.  For example, a 2 Year Treasury Note is over 5% right now, higher than the 10 Year Treasury Note even.  The stock market does not like surprises and imbalance.  We saw both of those this month with an imbalance in the investors’ belief the Federal Reserve would curtail rates sooner and the Fed surprising them that they would not, at least not now. 

Our second major driver of the stock market this month was the disastrous month of Apple (AAPL).  In a move right out of the US playbook, China is reportedly expanding their ban on iPhones for any government related entity.  China then responded they weren't banning them, but the damage to Apple's stock remained.  Reports of their new iPhone15 overheating, do not help either (although on Saturday they seem to have found a solution so expect a bump early next week).   They make up over 7% of the S&P 500 and collapsed by almost 10%.  As one heavyweight goes so does the others.

Longer term, I do expect the higher interest rates to both reduce inflation, reduce GDP, and increase the unemployment number (IS-LM-FE at work).  The Federal Reserve will have to time all of this very carefully, lest they risk moving us into a recession, in an election year no less!  I’m not nearly as bullish on the next 3-9 months, but I’m also not a bear either.  I do expect the rest of the year to be flat, on average, as investors continue to wait out moves in the general economy by putting their investment dollars in bonds seeking 5% and waiting to jump in when the Fed decides everyone has had enough and signals they have met their targets.

Given the options we have with the TSP, I’m still strong on the C and I funds, as the companies in the S Fund are more susceptible to higher interest rates and the impacts that will accompany them.