Benchmark Review & Monthly Recap, September 2023

Stocks Slip Further in September as Yields Rise to Highest Level in Years


  • Stock market weakness from August continued in September and the S&P 500 Index recorded its first negative quarter of 2023.
  • The VIX Index, a measure of stock market volatility, closed September at 17.52. Reflecting higher volatility during the month, the VIX Index approached 20 for the first time since May.
  • The FOMC left the Fed Funds rate unchanged in September, but bond yields rose to their highest level in years during the month. In what has been a rather steady move higher since May, the 10-year U.S. Treasury yield closed the month at 4.59% after closing at 4.61% just a few days earlier. The market has not seen yields this high since prior to the credit crisis in 2007.
  • The increase in yields put pressure on bond returns in September and pushed some areas of the bond market into negative year-to-date territory.
  • The economy remains strong, but signs of modest slowing seem to be developing on the job front. Payroll additions and job openings have declined in recent months as companies appear more cautious in hiring at this point in the cycle.
  • On a positive note, corporate earnings are improving and earnings are expected to grow in calendar year 2023 and 2024.

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The strong early summer for stocks gave way to late-summer weakness and a fall that has started on a soft note as well. Declines in September were broad, with value stocks holding up only modestly better than growth stocks and large-caps holding up only modestly better than small-caps. However, declines were experienced across the board. International stocks declined less than U.S. stocks. See Table 1 for equity results for September, Q3 and year to date.

Table 1
Index September 2023 Q3 YTD
S&P 500 -4.77% -3.27% 13.07%
S&P 500 Equal Weight -5.08% -4.90% 1.79%
DJIA -3.42% -2.10% 2.73%
Russell 3000 -4.76% -3.25% 12.39%
NASDAQ Comp. -5.77% -3.94% 27.11%
Russell 2000 -5.89% -5.13% 2.54%
MSCI ACWI ex U.S. -3.16% -3.77% 5.34%
MSCI Emerging Mkts Net -2.62% -2.93% 1.82%
Source: Bloomberg For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

As the table shows, declines in September drove quarterly results into negative territory for most of these equity indices. Comparing and contrasting the S&P 500 Index with its equal-weighted counterpart provides important insight into this market. Driven by the strong performance of large-cap and mega-cap Technology companies, the S&P 500 Index shows a solid year-to-date gain of over 13%. However, the equal-weighted S&P 500 Index (which can be thought of as representing what the average stock is doing) reflects a much more modest gain of less than 2% so far this year.

Simply said, the largest cap Technology companies, which have a larger weighting in the S&P 500 Index, have been the primary drivers of the market in 2023. Meanwhile, the average stock has exhibited only modest returns. Further to that point, small-caps, as measured by the Russell 2000 Index, have gained only 2.54% so far this year and growth has dominated value. The Russell 1000 Growth Index has advanced 24.98% while its value counterpart has gained only 1.79% year to date. Large-cap growth stocks, and in particular, those in the Technology sector, have dominated results this year after struggling in 2022.

Broad international equities outperformed U.S. markets in September, but the U.S. has seen stronger results year to date. The MSCI ACWI ex. U.S. Index was down -3.16% in September and the MSCI Emerging Market Index fell -2.62%. We still see opportunities in international markets with valuations that are significantly lower than the U.S. and our expectation that the U.S. dollar will largely weaken over the short to intermediate term. However, so far this year, U.S. stocks have outperformed international stocks.

Fixed Income

As rates continued to rise, bond returns struggled for the month and quarter. Declines during the quarter pushed several of the bond indices into negative year-to-date territory with the exception of high yield. The 10-year U.S. Treasury yield has been trending upwards since late spring. Over the third quarter, the yield closed July at 3.97%, August at 4.09% and September at 4.59%. It was a tough quarter for bonds indeed with an acceleration of declines in September. Rates have been volatile in 2023, but the trend has clearly been higher in recent months. See Table 2 for fixed income index returns for September, Q3 and year to date.

Table 2
Index September 2023 Q3 YTD
Bloomberg U.S. Agg -2.54% -3.23% -1.21%
Bloomberg U.S. Credit -2.60% -3.01% 0.03%
Bloomberg U.S. High Yld -1.18% 0.46% 5.86%
Bloomberg Muni -2.93% -3.95% -1.38%
Bloomberg 30-year U.S. TSY -7.60% -12.72% -9.68%
Bloomberg U.S. TSY -2.21% -3.06% -1.52%
Source: Bloomberg. For illustrative purposes only. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.

We believe that the recent move higher in rates has presented bond investors with opportunities to invest at even higher yields and coupons than seen earlier this year. We certainly acknowledge that the accompanying near-term decline in bond prices has been a challenge. However, we believe that higher yields in bond portfolios could benefit clients over the longer term. We expect the 10-year U.S. Treasury yield to move lower as we go through 2023 and into 2024, but we also anticipate volatility along the way. The more interest rate sensitive pockets of the bond market (like U.S. Treasuries) have been the hardest hit with this recent move higher in rates. Less interest rate sensitive high-yield bonds have been the clear winner so far in 2023, which is not that surprising on the heels of such solid stock market gains as well.

We maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment. We also believe the role bonds play in a portfolio, to provide stable cash flow and to help offset the volatility of stocks in the long run, has not changed. Furthermore, we believe that bond yields are attractive in what are some of the highest yields we have seen in the last 15 years.

Economic Data and Outlook

The economy continued to show expansion in August based on data released in September and continued to follow up solid growth from the second quarter. The third reading of Q2 GDP showed growth at a 2.1% annualized pace, which matched the prior estimate but was a modest miss of expectations looking for a level of 2.2%. The personal consumption component of GDP dropped to only 0.8% annualized growth from the 1.7% pace expected and previously reported. This held back any upgrade to Q2 GDP growth for this third reading. In our opinion, monitoring consumer spending will be important moving forward due to the critical role that household spending plays in our economy.

The unemployment rate rose unexpectedly to 3.8% in August compared to expectations and the prior reading of 3.5%. However, this occurred as more people joined the job market as evidenced by the labor force participation rate increasing unexpectedly to 62.8% from 62.6%. More people seeking jobs is positive in our current environment as there are millions more jobs available than job seekers. August Non-farm payroll additions of 187,000 were ahead of expectations of 170,000 and the downwardly revised July additions of 157,000, but they were well off the 12-month average of 271,000 additions. For August, job openings bounced back to 9.61 million, which was well ahead of estimates of 8.816 million. Overall, job openings remained plentiful, but the number of job openings has been trending lower since early 2022.

The aggressive rate hikes by the Fed seems to be having some impact on the job market as companies are starting to rein in hiring activity. Chart 1 shows the number of job openings compared to the number of unemployed people. We know there has been a mismatch with millions more job openings than unemployed people and that trend continues. However, this difference has started to narrow, primarily driven by fewer job openings, but the number of unemployed seems to be leveling off and might be starting an initial trend higher. Monitoring the job market will remain important in determining the strength of the U.S. economy.

Chart 1
For illustrative purposes only. For illustrative purposes only.

It seems unlikely that the economy would slow too drastically with the current strength exhibited in the labor market. However, even a modest slowdown in the job market could be a headwind to economic activity due to the central role that consumer spending plays in the U.S. economy. We maintain our roughly 50/50 belief that the economy will have either a soft landing (slower, but ongoing growth) or a mild recession. We believe the odds are low (<10%) of a more normal recession with the current strength in the job market.

Wages climbed by 4.3% on an annual basis in August, which matched expectations. Strong economic data is likely a frustration for the Fed as it tries to combat inflation, but some cooldown in the job market could take pressure off the Fed as it evaluates additional potential rate hikes.

The headline Consumer Price Index (CPI) ticked higher in August to a 3.7% annual increase from July’s 3.2% annual gain. This was modestly higher than expectations of a 3.6% increase. The core CPI was 4.3% in August, an improvement from July’s 4.7%. The headline Producer Price Index (PPI) remained subdued with a 1.6% annual increase in August, but that was higher than expectations of 1.3% and the prior month’s 0.8% annual rise. The core PPI had an annual increase of 2.2% in August, which was in line with expectations. The Producer Price Index is generally seen as a leading indicator for inflation since these costs occur during the production part of the cycle before products are sold to consumers. The Personal Consumption Expenditures (PCE) Index showed a 3.5% annual gain in August from the 3.4% level in July and the core reading (the Fed’s preferred measure of inflation) was 3.9% compared to 4.3% the prior month. Both PCE readings were in-line with expectations.

Overall, it seems clear that the trajectory for inflation is lower and we expect inflation to continue this trend through 2023 and into 2024. However, we also expect some additional volatility in inflation readings as the high-water marks from the summer of 2022 have fallen off the measures and prior year comparisons become more difficult. The key question is whether the pace of improvement is good enough for the Fed or whether it might try to bring down inflation more rapidly to its long-term goal of about 2% with additional rate hikes. Chart 2 focuses on the Fed’s preferred measure of inflation, the Personal Consumption Expenditures Price Index from both a top line and core basis. The headline number rose higher as inflation surged last year and has fallen further compared to the core reading, but recall that the core reading is the primary way the Fed measures inflation.

Chart 2
For illustrative purposes only. For illustrative purposes only. Past performance is not indicative of future results.

Housing data was rather mixed in August, but the rise in interest rates, and therefore mortgage rates, has a softening impact on the broader housing market. Building permits, considered a leading indicator for housing, were at an annualized pace of 1.543 million in August – well above expectations of 1.440 million and sharply higher than the prior month of 1.443 million. However, housing starts had an equally impressive miss with a reading of 1.283 million with expectations calling for a 1.439 million annual rate and the prior month at 1.447 million.

Existing home sales modestly missed expectations and were lower than July’s levels when they were expected to improve. New home sales missed estimates as well, but the prior month’s reading was revised higher. Home prices rose fractionally in July when they were expected to drop fractionally based on the S&P CoreLogic 20-City Index. Mortgage rates took another leg higher in September and stand at multi-year highs. Chart 3 shows higher mortgage rates have slowed home construction based on housing starts.

Chart 3
For illustrative purposes only. For illustrative purposes only. Past performance is not indicative of future results.

The ISM Manufacturing Index for August improved to 47.6, which was above expectations, but it also marked the 10th straight month of contraction for this index. For September, this index made another move higher to 49.0, but it still signaled contraction for the 11th straight month. The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, came in at 54.5 in August, beating expectations of 52.5 and improving from 52.7 in July. Improving strength from this important part of the economy is always encouraging. Recall, the dividing line between expansion and contraction for the ISM indices is 50.

Retail sales (ex. auto and gas) rose by a surprising 0.2% in August, when a -0.1% contraction was expected. However, it is important to note that retail sales data is not inflation adjusted, so higher prices can appear to show more spending activity. The preliminary University of Michigan Sentiment reading for September dropped to 67.7 compared to expectations of 69.0 and the previous 69.5 level, which is not too surprising considering the weakness seen in the stock market over the last two months and higher gasoline prices.

The Conference Board’s Leading Index continued to decline and fell by -0.4% in August, which was modestly better than expectations of a -0.5% decline. For well over a year, the leading economic index has been flashing a warning sign of pending economic weakness, but it has yet to materialize to any large degree.

The FOMC met in September and as expected, declined to raise rates at this meeting. However, Chairman Powell raised the possibility that an additional rate hike might occur before the end of the year. Based on the “dot plot” estimates, one more rate hike is expected by Fed officials in 2023, but the number of expected cuts was reduced in half to just two for all of 2024. The dot plots also reflected Fed officials acknowledging that this economy is stronger than they were expecting just a few months ago as they upgraded GDP estimates and lowered unemployment estimates.

After this latest FOMC meeting, rates continued to move higher, and stocks continued to weaken to close out the third quarter. As always, we believe it is imperative for investors to stay focused on their long-term goals and not let short-term swings in the market derail them from their longer-term objectives.

Investment Implications

Clark Capital’s Top-Down, Quantitative Strategies

The tactical portfolios, including Fixed Income Total Return and Global Tactical, remained risk-on throughout the month. We have noticed that rising yields are starting to bite with risk assets challenging or slightly breaking support levels. Within the Style Opportunity portfolio, growth is favored as defensive equities have suffered with rising rates.

Clark Capital’s Bottom-Up, Fundamental Strategies

The equity portfolios continue to balance holdings between dominant large-cap growth companies and those anti-fragile large-cap, small-cap, and mid-cap companies that we believe continue to see strong business momentum despite sticky services inflation. Quality factors like free cash flow, return on equity, and debt coverage are outperforming cyclicals and defensives. Underperforming factors include negative earnings, beta, and capex to sales.

Within the Taxable Bond portfolio, the focus was to continue adding longer bonds (7-10 years to maturity) to take advantage of higher yields coupled with buying shorter (0-2 year) bonds, which won’t be impacted significantly if longer rates continue to march higher.

In the Tax-Free portfolios we used the seasonal weakness to our advantage by securing outsized coupons of 6% or greater on new issues to bolster defense positions and adding to the current yield profile. Coupon income is a large component of overall performance. We remain focused on maximizing current yield, without sacrificing overall yield or credit quality.


Event Period Estimate Actual Prior Revised
ISM Manufacturing Aug 47.00 47.60 46.4
ISM Services Index Aug 52.50 54.50 52.7
Change in Nonfarm Payrolls Aug 170k 187k 187k 157k
Unemployment Rate Aug 3.5% 3.8% 3.5%
Average Hourly Earnings YoY Aug 4.3% 4.3% 4.4%
JOLTS Job Openings Aug 8815k 9610k 8827k 8920k
PPI Final Demand MoM Aug 0.40% 0.70% 0.003 0.004
PPI Final Demand YoY Aug 1.30% 1.60% 0.008
PPI Ex Food and Energy MoM Aug 0.2% 0.2% 0.3% 0.4%
PPI Ex Food and Energy YoY Aug 2.2% 2.2% 2.4%
CPI MoM Aug 0.6% 0.6% 0.2%
CPI YoY Aug 3.6% 3.7% 3.2%
CPI Ex Food and Energy MoM Aug 0.2% 0.3% 0.2%
CPI Ex Food and Energy YoY Aug 4.3% 4.3% 4.7%
Retail Sales Ex Auto and Gas Aug -0.1% 0.2% 1.0% 0.7%
Industrial Production MoM Aug 0.1% 0.4% 1.0% 0.7%
Building Permits Aug 1440k 1543k 1442k 1443k
Housing Starts Aug 1439k 1283k 1452k 1447k
New Home Sales Aug 698k 675k 714k 739k
Existing Home Sales Aug 4.10m 4.04m 4.07m
Leading Index Aug -0.5% -0.4% -0.4% -0.3%
Durable Goods Orders Aug P -0.5% 0.2% -5.2% -5.6%
GDP Annualized QoQ 2Q T 2.2% 2.1% 2.1%
U. of Mich. Sentiment Sept P 69 67.7 69.5
Personal Income Aug 0.4% 0.4% 0.2%
Personal Spending Aug 0.5% 0.4% 0.8% 0.9%
S&P CoreLogic CS 20-City YoY NSA July -0.1% 0.1% -1.2% -1.2%

P=Preliminary, S=Second Reading
Source: Bloomberg

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Past performance is not indicative of future results. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Material presented has been derived from sources considered to be reliable and has not been independently verified by us or our personnel. Nothing herein should be construed as a solicitation, recommendation or an offer to buy, sell or hold any securities, other investments or to adopt any investment strategy or strategies. Investors must make their own decisions based on their specific investment objectives and financial circumstances. Investing involves risk, including loss of principal.
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