Investors are losing faith in the idea that stocks will continue to climb. That could indicate trouble, but this year’s S&P 500 is still up 12 percent. The index is dominated by tech stocks, led by chip maker Nvidia, including Apple, Microsoft, Meta, Amazon and Tesla. Take those companies out of the index, and it’s up only about 1 percent.
The S&P 500 ended lower on Friday as investors digested the implications of a U.S. inflation report for the Federal Reserve’s interest rate policy and adjusted their portfolios on the last day of a weak third quarter for stocks. The index shed almost 5 percent in September, its steepest monthly percentage drop of the year, and lost 2.4% for the quarter.
A softer-than-expected rise in consumer prices pushed the U.S. inflation rate below the Fed’s target for a second consecutive month. The sluggish pace of inflation fueled hopes that the Fed will delay another interest-rate hike until early 2024, though that is far from guaranteed. The report showed that consumer prices rose 0.6% in August, a touch slower than the forecast of a 0.7% rise. More importantly, the underlying consumer-price index, excluding food and energy prices, rose only 0.2% after 1.5% in July. The Fed more closely watches that core index, looking for evidence that underlying inflation pressures are easing.
Analysts say the core PCE index will unlikely shift investors’ expectations about whether the Fed will raise rates next month. Instead, many analysts expect traders to adjust their bets about the amount by which the Fed will raise rates, shifting into bets for a minor increase rather than one that would be more aggressive.
The PCE data, coupled with the Fed’s hawkish outlook for interest rates, rattled investors as benchmark Treasury yields rose to near 16-year highs. That makes investors less willing to pay high prices for stocks, considered a riskier investment than bonds.
The S&P 500 and Nasdaq posted their most significant monthly percentage drops of the year, while all three major indexes had their first quarterly declines in 2023. Investors are also concerned about a potential government shutdown, autoworkers’ ongoing strike, and surging oil prices. All of these factors have pushed investors to rethink their investing strategies, and it may be time to switch from the “buy the dip” mentality that has driven markets in recent years. The S&P 500 is down from its record high in 2022 but is well above the level that would qualify as a bear market, defined as a drop of 20% or more from a peak. According to FactSet data, the S&P remains up about 12 percent this year despite the losses. The Dow Jones Industrial Average is down about 1% and the Nasdaq Composite is down about 1.5%. The Federal Reserve will release its latest economic growth and inflation update on Friday.
