September has lived up to its reputation as an ugly month for stocks, but even traditional defensive sectors have failed to provide much shelter. The culprit? The bond market.
The main story dominating September has been the rise in rates, particularly the 10-year Treasury yield. As a result, we’ve witnessed a selloff in rate-sensitive stocks within the market, according to Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management.
This explains why utilities, typically considered a bedrock defensive sector, are facing a monthly loss of over 6%, making it the second-worst performing sector in the S&P 500. Real estate, which is similarly rate-sensitive, has suffered an even greater decline of more than 8%.
One of the reasons utilities are seen as a defensive play is due to their high dividend yields, causing them to trade in a manner similar to bonds. With Treasurys and other bonds experiencing a rout, utilities as bond proxies in the equity market are also feeling the pain. Additionally, utilities tend to carry high levels of debt, further amplifying their sensitivity to interest rates.
As of Thursday’s close, the S&P 500 is set to experience a monthly loss of approximately 4.6%, while the Dow Jones Industrial Average has declined by 3.1% and the Nasdaq Composite has retreated by 6%. Historically, September is known as the worst month for equities.
Although stocks have performed well overall in 2023, back-to-back monthly losses and a surge in Treasury yields to 16-year highs are likely to contribute to a jittery start to the fourth quarter.
In a surprising twist, energy is the only sector experiencing positive returns in September. The Energy Select Sector SPDR ETF has gained around 1.7% for the month. It is also the only sector with positive performance for the quarter, boasting a gain of more than 11% compared to the S&P 500’s pullback of 3.8%.
See: 4 reasons oil prices are surging toward $100 a barrel
Oil Companies Rally as Crude Prices Soar
The recent surge in crude oil prices has propelled oil companies to new heights. The U.S. benchmark CL00, -0.86% briefly exceeded $95 a barrel, while Brent crude BRN00, -0.83% came close to the $100-a-barrel mark. Exxon Mobil XOM, -2.20% achieved a record high on Wednesday, reflecting the positive sentiment in the industry.
A major contributing factor to the rally is the tight supply of crude, which has been exacerbated by Saudi Arabia’s decision to cut production by 1 million barrels a day. This production cut has been extended by Ryadh through the end of the year. However, sustaining these gains may prove more challenging if demand for gasoline and other fuels dwindles due to the higher prices. Analysts suggest that crack spreads, the price difference between crude oil and its refined products, have started to decline after soaring during the summer months.
In contrast, the utilities sector has experienced a downturn, with a 6.8% decrease this week, representing its worst performance since September 2022 according to Dow Jones Market Data. Some experts interpret this as a “capitulation” and anticipate a potential rebound in the near future. Jeff deGraaf, chairman of Renaissance Macro Research, believes that when returns are exceptionally poor and risks remain high due to volatility, there is a chance for a turnaround. He cites a similar capitulation signal in 2018 that proved to be highly effective.
Looking ahead, market strategists emphasize that the direction of interest rates in October and the fourth quarter will significantly impact overall market performance. A continued rise in rates and real yields may necessitate a reevaluation of stock-market valuations. Conversely, evidence suggesting that the recent market surge is temporary could allow bullish investors to regain their momentum.