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Markets Ride Out A September To Remember

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCAP, SCHX, SDOW, SDS, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Michael Loewengart
Summary

US equities gained ground in September against formidable obstacles, and in another unlikely development, value stocks made a valiant comeback.

International equities delivered solid returns in September—and that included emerging markets, which have underperformed their developed-market counterparts for much of the year.

The yield on the benchmark 10-year Treasury note climbed roughly 20 basis points over the past month after fluctuating on conflicting prospects for a US-China trade deal.

Imagine, if you will, this scenario: Drone attacks take out 5% of the world's oil supply in one day, two economic superpowers get locked into a protracted trade war, and projected global growth rates fall to their lowest levels in a decade. The Federal Reserve grows so concerned that it cuts interest rates. Again. Oh, and throw in an impeachment inquiry for good measure.

Imagine what that could do to the markets.

Now open your eyes. September delivered quite a plot twist: Against all odds, stocks rose.

US equities

US equities gained ground in September against formidable obstacles, and in another unlikely development, value stocks made a valiant comeback-one of the few months in which this long-overlooked segment has notched a solid win.

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Partly as a result of drone attacks that briefly wiped out 50% of Saudi Arabia's crude oil production, energy was a strong performer in September-a sharp reversal in an otherwise dismal year for the sector. Whether energy can continue this momentum remains to be seen, particularly given reduced forecasts for global growth.

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International equities

International equities delivered solid returns in September-and that included emerging markets, which have underperformed their developed-market counterparts for much of the year. As in the US, bargain hunters led a rotation into value stocks, which gained nearly 5% on the month.

Japanese returns were especially strong in September, as exporters capitalized on a weak yen and investors looked to the Bank of Japan to loosen monetary policy next month.

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Fixed income

The Federal Reserve cut interest rates for the second time in three calendar months at its September meeting-part of a global trend of monetary easing. But the Fed's decision did little to arrest the whipsawing of Treasury yields: The yield on the benchmark 10-year Treasury note climbed roughly 20 basis points over the past month after fluctuating on conflicting prospects for a US-China trade deal. In turn, rising longer-term yields put a damper on fixed income returns.

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Looking ahead

As the fourth quarter gets underway, investors will face no shortage of market headwinds and mixed economic signals.

• Fed watching resumes: After paring interest rates by a cumulative 0.50%, the Fed has begun injecting cash into the financial system through repurchase agreements-essentially, short-term loans to banks. This monetary stimulus will remain in effect through early October before the Fed again weighs in on interest rates. The Fed has provided little in the way of guidance, and prognosticators seem divided on the issue, so October's meeting could be interesting.

• The return of value? It's been a while since value stocks have had their day, but they finally emerged from the shadows in September on the strength of financials and energy. Whether this becomes a longer-term rotation remains to be seen. Given headline risks to global growth, high-flying growth stocks could be due for a breather.

• Trade and political uncertainty: The US and China have both expressed a willingness to come to terms on trade, but an agreement remains elusive. Adding to the intrigue is an emerging presidential impeachment battle. In the past, the markets have been able to look beyond political discord, yet the Congressional showdown adds another layer of uncertainty.

Given the past month's developments, it's a wonder that stocks performed as well as they did. Regardless, uncertain times underscore the importance of diversification, which can help investors weather periodic market volatility.

Now come the ghouls of October, which have historically-but not always-spooked investors. Here's hoping the treats outweigh the tricks.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.