September lived up to its reputation as a bad month for stocks. Global equity markets declined more than 4%, making September the worst month since the start of the pandemic. Beyond seasonal weakness, many attributed equity losses to higher interest rates. While rates clearly played a part, market patterns suggest that there was more going on than just a negative reaction to higher rates. Instead, investor behavior continues to be driven by an increasing focus on earnings and cash flow. Absent a significant change in either the growth and/or rate outlook, this is likely to continue.
1.50% 10 year ≠ end of the bull market
As I’ve discussed in previous blogs, the historical link between rates and equities is complicated, particularly when rates are low. It is also important to note that rates have been rangebound. Unlike last fall, when long-term rates began a melt-up that resulted in a near tripling of yields, today rates and rate vol are relatively contained. Rate volatility, as measured by the MOVE Index, remains well below the July and February peak. Moreover, the co-movement between rates and stocks in September suggests rates were not the dominant theme; there was effectively a zero correlation between daily changes in U.S. rates and U.S. equities last month.