The riskiest stocks in your portfolio right now are the ones you thought were safe
The labor market accelerated, inflation slowed, and the Fed signaled it's in no hurry. Yet the yield on the U.S. Treasury bond shot to its highest level in 24 years. Who is actually tightening here, and why are the stocks that were supposed to protect portfolios taking the biggest hit?
Key points
The Fed raised rates by 25 basis points, while the market added more than double that in the same month.
The yield on the ten-year bond climbed above 5.30%, the highest since spring 2002.
The S&P 500 lost only 0.4% in September, but the average stock in it fell nearly 6%.
The worst hit were utilities, real estate, and consumer staples—sectors bought precisely for their calm.
The gap between the earnings yield of stocks and the bond yield disappeared for the first time in twenty years.
The day the textbook stopped working
By all the rules, Wednesday, September 30 should have been a good day for stocks. The ADP report came in the morning: private companies in the U.S. created 90,000 jobs in September, well above the expected 68,000 and the first acceleration after three months of slowing. The August figure was revised down to just 36,000. An hour later, inflation arrived: the core PCE index, which the Fed watches most closely, slowed to 3.0% instead of the expected 3.3%.
The day before, New York Fed chief John Williams said that after September's rate hike there was no rush, and the odds of another hike in October fell from over 70% to a coin toss. A strong economy, softer inflation, a calmer central bank. What more could you ask for?
The result was the opposite. The yield on the ten-year U.S. Treasury bond climbed above 5.30%, the highest since spring 2002 and above the 2007 peak. The S&P 500 rose most of the day, then reversed into a loss in the final minutes and closed its worst month since June: -0.4% in September, with the Dow Jones even down 4.3%. And here arises the question most investors don't ask: if the Fed just signaled it's braking, who is actually tightening?