With the major stock and bond indices all experiencing declines in the third quarter, the question begs if this is merely a seasonal pattern where the market tends to underperform, or if there are underlying factors at play. To explore this question, we delve into historical data related to the stock market in pre-election years.
The chart above overlays the year-to-date performance of the S&P 500 as of September 15, 2023, with the average performance of the S&P 500 in every pre-election year since 1950. While this year has displayed a bit more volatility compared to the historical average, it has followed a similar trajectory where the average performance remained within a certain range through October, followed by a year-end rally. It’s essential to remember that past performance does not guarantee future results, but we will continue to use historical data as a reference point when analyzing future market movements.
Crude Oil & Its Correlation with the Market
In last month’s edition of On the Street, we discussed the potential for crude oil futures to rebound, potentially driving up energy stocks in the process. In the chart below, we examine the one-month performance of crude oil, energy stocks, and the S&P 500.
Crude oil prices have surged by 8.68%, resulting in energy stocks outperforming the market, registering a gain of 1.65% compared to the S&P 500’s decline of -4.87%. Our purpose in revisiting this topic is not merely self-congratulatory but rather to analyze the correlation between crude oil prices and the overall stock market. This correlation holds heightened significance in the current economic climate, as the Federal Reserve is still in a ‘wait and see’ mode.
Should crude oil’s ascent persist, it has the potential to maintain elevated inflation levels, possibly prompting the Federal Reserve to implement an additional interest rate hike. While our viewpoint aligns with the belief that interest rates may not necessarily need to rise further, our perspective carries less weight compared to the inclinations of Jerome Powell and the Federal Reserve, who are still hinting at more hikes could be on the table.
Average Returns 12 Months Rate Hiking Cycle Ends
While the possibility of another rate hike remains on the horizon, we find it valuable to examine how both the stock and bond markets typically behave after the conclusion of a rate hiking cycle. Below, we present a chart provided by PGIM Investments, which analyzes the performance of major stock and bond indices over the subsequent 12 months following the conclusion of the last four rate hiking cycles.
Source: Morningstar and S&P. Average returns 12 months following the end of each of the past four Fed rate hike cycles (end dates used: 2/1/1995, 5/16/2000, 6/29/2006, 12/20/2018). S&P 500 Index (U.S. Equity), MSCI All Country World Index (Global Equity), MSCI Emerging Markets Index (EM Equity), Russell Mid Cap Index (Mid Cap), Russell 1000 Index (Large Cap), Russell 2000 Index (Small Cap), JP Morgan EMBI Global Diversified Index (EM Bond), Bloomberg U.S. Aggregate Bond Index (U.S. Bond), Bloomberg Global Aggregate Bond Index (Global Bond), Bloomberg U.S. Credit Index (IG Corp), Bloomberg High Yield Corporate Index (High Yield), Bloomberg U.S. Treasury Index (U.S. Treasury). Past performance does not guarantee future results.
It comes as no surprise that the bond market has historically performed quite well in such scenarios, given that interest rates were elevated during rate hiking cycles and are now either stable or in a cutting phase. The stock market has also witnessed similar positive returns. However, it’s important to emphasize that past performance should not be taken as a guarantee of future results.
It’s noteworthy that rate cuts have often followed the conclusion of rate hikes in each of these sample data points, primarily due to an economic softening. We highlight this observation to underscore the crucial distinction between the economy and the stock market. It’s entirely possible for economic data to deteriorate while the stock market follows a different trajectory, deviating from the path of economic news.
Articles We’re Reading
Some positive signs emerging for potential US homebuyers (Insider)
First student loan repayments coming due this month (Axios)
VCs advising startups to postpone plans to IPO until rates plateau (FT)
For the Month Ending 9/30/2023 (Cumulative Returns)1
1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.
Did You Know?
As autumn arrives and leaves begin to change color, coffee shops across the country embrace a beloved annual tradition – the Pumpkin Spiced Latte (PSL). Starbucks introduced their first PSL back in 2003, and in the most recent year, sales of pumpkin-flavored products in the United States reached an impressive $802.5 million, marking a 42% increase since 2019, according to Nielsen.
The credit for creating the Pumpkin Spiced Latte goes to Peter Dukes, who led the beverage development team at the time. Interestingly, the PSL almost didn’t come to be. Dukes and his team convened in what they referred to as the “Liquid Lab” to brainstorm ideas that would resonate with customers during the fall season. Their brainstorming session yielded a list of 100 different flavored beverages, which they promptly narrowed down to a top 10. Surprisingly, the “pumpkin latte” concept was at the very bottom of their list.
Despite its initial placement, they decided to run with the idea. Now, two decades later, it stands as one of Starbucks’ best-selling items each year.”
Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser
The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.