For the capital markets, it has been one cold September. Call it the spleen of fall, or the brutal reality of higher interest rates, it took a toll on most asset classes.
At the opening on Friday 29th September, energy is the only asset class that really performed in the whole month of September. Equities and bonds correlated again, with 20-year+ treasuries taking the toughest plunge of -7%. Higher yields were a poor consolation for longer term holders.
What happened? In short, a steep rise in interest rate expectations on the back of rising inflation, driven by higher energy prices.
There was a twist though. Long-term rates rose faster than short-term ones, repricing the expectation that rates may be “higher-for-longer”. A higher term-premium of sort.
While doing so, the gap between 12-month and 30-year rate narrowed from 150bps in Jun23 to 80bps now. It both shows that we are most probably past peak on the curve inversion, and we are preparing for a “new normal” of higher inflation and higher growth than we’ve seen pre-covid.
What investors should do? Aside from the perennial benefit of having a diversified portfolio that suits your long-term needs, here are a few things to be conscious of.
First, the rally in energy prices results from a contextual supply shock. OPEC maintains a tight supply, and US Cushing stock continues to drain. US crude came all the way from $84 to $90/bbl this month, around the EIA forecast for this year. This recent rally is prompting some end-of-month profit taking, all the more than (i) shale supply might kick in as pumping becomes profitable again, and (ii) global demand drivers are looking tepid.
Secondly, I’d be wary of finding deep value in interest-sensitive assets, as rates continue to rip up. Although, Real estate, utilities, or 30-year treasuries are starting to look oversold. Financials haven’t corrected as much as they probably should. I sense that the dramatic fall in long-dated treasuries is wreaking havoc in banks, pension funds, and insurance at the moment. Remember the banking mini-crash of Mar23?
Lastly, I’m not entirely sure to buy into the “higher for longer” new normal. Granted, consumer’s sentiment, income and spending continue to be strong, but strength is ebbing. Likewise, corporate profits are still historically high but easing down. Price increases are a thing of the past, and wage pressures still build up.
Let’s just hope that the other months ending in brrrr will not be as gloomy as September.
Stay safe out there !
360 Advisory LLC is a Boston-based RIA managing investments