U.S Overview
September proved to be a difficult month as the significant decline of most U.S. sectors was somewhat masked by the outperformance of two sectors, oil and technology. The S&P 500 slipped about half a percent, the Nasdaq rose nearly 2%, and the Dow fell roughly 4%. Underneath, technology was the only sector in the index to finish higher, gaining about 5%, while financials, materials and real estate each fell around 7% and utilities around 6%. Smaller companies fared worst, with the Russell 2000 down more than 5%. For balanced portfolios, this was a difficult combination, because the sectors that pay dividends and anchor diversified holdings were the ones that fell.
In our past monthly letters, we have discussed how much of this market’s performance has been buoyed by a small group of technology companies. September is the strongest reflection of these concentration issues. The same breadth that protected our portfolios during the June tech sector crash, adversely affected those portfolios when tech was only one of two sectors that outperformed the broader market in September. Yet, neither our overperformance in June nor our underperformance in September says much about the next five or ten years, which is the horizon that matters for most of our customers.
On September 16, the Federal Reserve raised its benchmark rate by a quarter point to a range of 3.75% to 4.00%, the first increase since 2023. The vote was unanimous, which is important, because the same committee split 9 to 3 in July. Chair Kevin Warsh said inflation is too high and has been for too long, and described the move as removing a dose of accommodation rather than tightening into a slowdown. Sixteen of the eighteen officials who submitted forecasts expect at least one more increase before year-end. On the final day of the month, August inflation data came in cooler than expected.
International Overview
Europe’s streak of monthly gains ended in September. The STOXX 600 slipped through most of the month as rising bond yields and the continued conflict in the Gulf weighed on sentiment, though it recovered part of the loss in the final week of September. Europe carries a heavier weighting in banks and industrials than the United States does, and those sectors struggled worldwide as bond prices fell. The European Central Bank held its deposit rate at 2.25%.
Asia swung hard in both directions. Japan’s Nikkei 225 fell nearly 3% in a single early session, recovered by 2% mid-month, and finished the month up less than 1%. South Korea’s Kospi dropped 4% in one session, rose 4.6% in another, and ended the month flat, with chipmakers Samsung Electronics and SK Hynix driving most of those moves. Japan remains the best-performing major market in the world this year, up roughly 29%, and Korea has gained more than 60%. We hold these markets through broad index funds rather than individual companies.
Emerging markets had a difficult September. A rising dollar, higher U.S. interest rates, and oil above $100 a barrel are a difficult combination for countries that import energy and borrow in dollars. The Diversified portfolios hold emerging market exposure through their international equity allocation.
What does this mean for you?
September saw stocks outside of technology and oil fall, bonds fell as yields rose, and oil climbed above $100 per barrel. Our Diversified portfolios returned between -1.07% and -1.61% for the month, and our Fossil Free portfolios between -1.71% and -2.09%. The order inside those ranges runs contrary to what most people expect: the more conservative the portfolio, the worse it did. Bonds fell further than stocks, so the portfolios holding the most bonds absorbed the most damage. Our Stable Value Portfolio returned 0.16% for the month and 2.31% year to date, an annualized rate of 3.07%, and was the only portfolio to finish September in positive territory.
Measured against their benchmarks, all six portfolios finished within 15 basis points for the month. The year-to-date picture separates the two families. All three Diversified portfolios are ahead of their benchmarks, led by the Conservative Portfolio at 5.62% against 4.78%. All three Fossil Free portfolios are slightly behind theirs by roughly 0.6% and 0.8%. This gap traces almost entirely to oil prices.
The bond market was the hardest place to be in September. The 10-year Treasury yield climbed to 5.29%, up from roughly 4.7% in August and from below 4% before the Iran conflict began in February. Because bond prices fall as yields rise, that meant losses on bonds already held, with the longest maturities falling most. This is the third consecutive month that fixed income has worked against results rather than cushioning them. Bonds usually rise when stocks fall, but that relationship weakens when inflation rather than slowing growth is driving markets, which is why both fell together. Yields pulled back in the first days of October, which offers some relief, but we cannot anticipate the further effects the war in Iran will have on U.S. markets.
Thank you for your continued trust and support. It is our privilege to serve as stewards of your financial assets.
Sincerely,
The Faith Foundation Team
