US stock market sheds over 8% in September

The US stock market’s weakest month of the year is typically September. In the past, September has never been kind to stock market investors, making it the worst month overall. The performance of the US stock market in September 2022 followed previous trends accurately. Wall Street key indices ended the month showing further weakness in the weeks if not months ahead. Dow 30 posted a fall of 8% before settling at 28,725.51, S&P 500 also fell by over 8% ending the month at 3,585.62 while the tech-heavy Nasdaq 100 slumped by 9.32% to end September on a bitter note.

For the first time since 2009, US stocks lost money for three consecutive quarters. It was the worst September result for the S&P 500 and Dow since 2002.

US stock market indices falling over 8% in a month comes on the back of two major events – One, the US CPI August data announced on September 13 showed sticky inflation while the second was the Fed’s FOMC meeting on September 20-21 which also turned out to be disappointing for the markets.

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In addition to the rate hike, the economic projections released by FOMC painted a gloomy outlook for the market ahead. The Dow 30 index fell by more than 1200 points in a single day as a result of the US CPI data for August 2022 showing inflation refusing to go down quickly. This was the worst day for US stocks in more than two years.

The ongoing slump in the market could be leading retail investors to make an exit from the market. The latest American Association of Individual Investors (AAII) Sentiment Survey shows that the percentage of individual investors describing their six-month outlook for stocks as ‘bearish’ rebounded to its highest level since 2009.

In its FOMC meeting on September 21, the US Federal Reserve announced a 75 basis point (bps) rate increase. Since then, hawkish interpretations of Powell’s press conference, dot plot, and Fed rate hike have been processed by the market.

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According to the dot plot, Fed officials anticipated rates to climb to 4.4% in 2022 and 4.6% the following year, both of which were higher than anticipated by the market. The Fed has made it clearer than ever that it is prepared to endure a recession as the necessary trade-off for regaining control of inflation by foreseeing an extra 1.25 percentage points of tightening by the year’s end.

Wall Street investors are aware that a scenario with high-interest rates will have an adverse effect on the company’s margins and corporate profits. Additionally, the US Fed’s actions to reduce inflation to below 2% risk further degrading the state of the economy. A full-fledged US recession might have negative effects on the market as well.

Market volatility persisted due to mounting worries of a global recession. Fed Chair Powell had previously spoken of additional economic harm from rate increases intended to curb inflation. Growing concerns about a slowdown in global growth under the backdrop of tightening financial conditions lowered investor optimism. Incidentally, Morgan Stanley, JPMorgan, Goldman and BlackRock turn bearish on stocks as recession risk rises.

Going forward, it remains to be seen how US CPI numbers come in for the month of September and will there be any room for the Fed to revise or have a re-look at the future rate hikes. The real impact of a rate hike on the economy may still be a few quarters away, and till then the stock market volatility could be at a high.

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