Global Market Commentary- September 2022

Global markets continued to slide in September after pulling back in the latter part of August, wiping out gains from earlier in the year and therefore, sinking to new lows for the year. The MSCI World Islamic Index and the Dow Jones Sukuk Index fell respectively by 8.9% and 3.6% in September.

A large factor in stock prices falling was the rise in market interest rates, as measured by yields on government bonds, which increased the discounting of future company cash flows implied in their prices. The US two-year yield cracked 4% in September, a level that was unheard of since before the Great Recession in 2008. 

The central banks of the United States, the United Kingdom, and Europe all announced plans to continue their monetary tightening cycle, as they had previously stated. The markets had not yet fully grasped the impact of interest rate hikes on the global economic outlook prior to September, and taking stock of the accumulated hikes through September served as a wake up call that rattled prices across all asset classes.

Along with these realizations, there were some surprises that further weakened the confidence of market participants that an economic rebound would emerge. 

Among these surprises: the consumer price index (CPI) printed higher than expected in the US and Europe, with the US print showing a 0.1% rise in August despite a 10.5% decline in gasoline prices; FedEx withdrew its earnings guidance, signaling a sharper slowdown in inventory movement and economic activity than previously thought; Putin began to mobilize the Russian population to prolong the war in Ukraine, which is worsening Europe’s energy crisis; and the UK government’s proposed tax cuts were met with severe backlash by economists citing affordability concerns, which brought the British pound to all-time lows against the US dollar, nearly approaching parity.

In total, the S&P 500 dropped 9.3% in September 2022. By the end of the month, the US market was trading on a price-to-earnings (P/E) ratio of 15.1 as compared to its long-term average of 16.8. This indicates that US equities are priced at relatively attractive levels; the earnings being priced are based on current consensus analyst forecasts for earnings growth, which are gradually being revised down. If Q3 2022 earnings surprise positively in the coming weeks, or the Federal Reserve prepares to wind down its interest rate hiking cycle, this may re-energize US equity market returns.

In the UK, the fallout from the announced tax cuts was swift and emphatic. With government bond yields rising to levels not seen in decades and UK assets rapidly losing value, pension funds entered a mini-crisis and the Bank of England was forced to buy 65 billion pounds Sterling worth of government bonds to rein in yields, a monetary easing measure which was inconsistent with the interest rate hikes the Bank is employing to achieve monetary tightening. In addition, Europe also faced a setback as Russia halted gas flows through the Nord Stream 1 pipeline, in retaliation for an increasingly attritious war in Ukraine.

Interest rate hikes in developed countries and concerns about weakening continued to weigh on markets in China and other emerging economies.The UN Conference on Trade and Development estimates that a percentage point rise in the US Federal Reserve’s key interest rate lowers economic output in other developed countries by 0.5% and economic output in developing countries by 0.8% over the subsequent three years.

Looking ahead, October is a traditionally more volatile month. However, it is worth noting that out of the 14 bear and near-bear markets since WWII that experienced an October (as measured by the S&P 500), 6 of them ended during October. Subject to any economic factors, this statistical quirk may offer hope that markets may consider the coming months a good time to change their tune.