In September, we saw market volatility continue from the previous month, with a broad-based investor sell off reinforcing the ‘September Effect’, which has seen the 9th month of the year deliver historically weak returns.
The US dollar was one of the only places to remain relatively unscathed, as has been the case so far this year. The extreme volatility we are experiencing right now in the markets echoes the challenging economic landscape and outlook, which has been caused by a variety of ongoing factors, including challenging inflation and interest rate rises.
One consolation is that volatile periods come and go, meaning staying invested could give us the best chance of reaching our goals (as according to a tried-and-tested, long-term approach). After all, if you sell while markets are down, you run the risk of making your losses real by not giving your investments the time to potentially recover.
The ongoing delivery of jumbo US interest rate hikes to tackle inflation continued to ripple across the global economy. These hikes, coupled with promises of further tightening in the face of potential economic concerns, rattled investors as it became more widely accepted that inflation – not the preservation of economic growth – will remain the primary focus until price pressure abates.
The uncertainty around inflation – and difficultly of predicting when such price pressures will soften – drove extreme volatility across markets, and a flight to safe-haven assets such as the US dollar.
The announcement of the UK’s mini budget on 23rd September only added further fuel to the fire by causing wide-spread concern across UK investors. While many of the measures had been predicted in advance, the market took a decidedly negative view on the UK’s debt and fiscal sustainability off the back of this.
The government’s confirmation that there would be unfunded tax cuts accompanied by large spending plans drove a downward spiral of UK asset prices – including sterling – towards the end of the month, and sterling actually reached a record low against the dollar following the announcement.2
Credibility will be difficult to restore, but one positive to keep in mind is that there is much room for improvement. Thankfully, the BOE (Bank of England), which has also had its fair share of credibility issues of late, came to the rescue.
To help stablise markets and economic stability, the Bank Of England intervened in bond markets (which saw unprecedented volatility in the wake of the announcement) by purchasing UK government bonds to stem the price spiral and help restore some level of calm and normalcy. We have also already seen indications of Government U-turns on certain aspects of the mini budget with the aim of settling markets.
Some good news is that there is little appetite for changes to the planned spending to alleviate rising energy bills, which would’ve seen consumers face another 80% hike in what they are paying for gas from October. This was on top of the 54% increase we already experienced in Spring.
The UK Government has intervened by reducing the unit cost of gas and electricity so that energy bills will now be around £2,500 annually for the average household in the UK, and they will stay at this cost for at least the next two years1.This should at least provide some degree of certainty in an otherwise uncertain backdrop.
Additionally, UK data released in September showed that the labour market gained in strength, with unemployment falling to 3.6%. — the lowest level experienced in 50 years. The manufacturing sector began to contract, but surprisingly ended on the upside. The service sector also continued to grow, albeit at a slightly lower rate than forecasted, while the Consumer Price Inflation (CPI) fell slightly, decreasing from 10.1% to 9.9% year on year (YOY).
Data coming out of the Eurozone was slightly more negative but painted a similar overall picture when compared to the UK.
Inflation increased from 8.9% to 9.1% YOY ahead of expectations, as supply chain disruptions saw broad-based price pressures take hold. Eurozone manufacturing and services showed signs of contraction, but unemployment levels remained healthy and unchanged at 6.6%.
There was slightly more positivity in the figures from across the pond, where data released for the US in September showed that August’s inflation figures dipped slightly from 8.5% to 8.3% YOY. However, this data was still above forecasts, which subsequently increased the expectations of higher interest rates for longer, impacting markets negatively as a result.
US manufacturing continued its healthy growth, while the US service sector accelerated, with both measures coming in ahead of expectations — underpinning the current strength and resilience of the US economy.
The US labour market – a key focus for policy makers – continued to show robust gains, with 315,000 jobs added in August, which again exceeded expectations, but by a lower margin than the previous month. Interestingly, unemployment in the US increased from 3.5% to 3.7% as more people entered the workforce.
This increase, accompanied with the higher-than-expected inflation figures, provided a negative shock in September. This was due to the fact that the markets’ expectations were adjusted to price in the potential of higher – and for longer – interest rates in a bid to ease the inflation outlook.
Most share markets delivered negative returns in September as investors sought safety from a potentially souring economic outlook, which remains at the ransom of inflation.
Emerging markets (-11.90%) and Asia-Pacific (-12.92%) both notably declined, as heightened risk aversion saw investors flee riskier share markets during this time. Developed markets were not far behind as the US (-9.34%) came under pressure from increased threats of recession at the hands of those aforementioned higher-for-longer interest rates.
Europe (-6.57%) and Japan (-6.78%) showed similarly negative returns, while closer to home, the defensive qualities of the FTSE 100 (-5.36%) helped to an extent. However, the FTSE 250 (-9.94%) was not spared, as investor sentiment towards the UK took a knock.
Sterling again weakened against most major currencies off the back of the UK Government’s mini-budget announcement. Sentiment took a negative turn, as doubts grew around the BOE’s appetite and capacity to raise interest rates as aggressively as the US and Europe have already done.
The pound weakened considerably against the US dollar (-4.05%), as the Federal Reserve reaffirmed its commitment to curb inflation, which surprised to the upside. It is worth noting, however, that relative strength of the US economy and the safe-haven status of the US dollar have been powerful drivers of broad dollar strength, not just against the pound.
This effect was seen as sterling weakened much less against the euro (-1.44%) while gaining against the Japanese yen (+0.11), with most of these movements driven by differences in expectations of interest rates which, in turn, are caused by inflation prints.
Investment type performance breakdown
In our Original Plans, rising recessionary risks (which has come off the back of central banks reaffirming their commitment to reducing inflation) saw strongly negative returns across all major asset classes in September.
Shares (-7.37%) and property (-8.90%) were down as investors sought safety, while an outlook of increasing interest rates had a notable impact on bonds (-3.49%). We also saw a similar performance in our Ethical Plans, with shares (-6.85%) and bonds (-4.65%) ending the month in negative territory.
Ethical and Original Plans exhibited similar performance over the month, with the former showing slightly more negative performance. Again, this was as rising interest rate expectations continue to impact its higher allocation to growth assets.
Summary with Plan details
Markets have become increasingly skittish since the second half of August. Uncertainty related to the economic environment continued to plague asset prices in September, which was a negative month for all our Investment Plans in both Original and Ethical themes.
Overall, our Plans with higher levels of shares and property underperformed against Plans with a higher level of bonds. Financial markets continue to exhibit elevated volatility against a very uncertain economic backdrop, as indicated by large asset price changes from month-to-month —and even day-to-day.
Our Investment Team continues to actively monitor the financial markets and their impact on your Plan, and we are ready to act in your best interests to events as they unfold. We are continually evaluating new market information and the key market drivers to help keep your Investment Plan on track.
It’s important to remember that it’s normal for markets to go up and down, with periods of volatility to be expected when you invest. As always, we continue to look for opportunities to position your investments with the goal of protecting your money and achieving your long-term objectives.
Please remember the value of your investments can go down as well as up, and you could get back less than invested. Past performance is not a reliable indicator of future results.