Monthly Market Update - September 2023


  • The S&P 500 experienced a 5% decline in the first three weeks of August before rebounding, ending the month down 1.6%, bringing the year-to-date return to 18.7%.

  • Intermediate interest rates rose sharply, with the 10-year Treasury briefly exceeding 4.3% before ending the month at 4.1%.

  • The U.S. economy remained relatively strong compared to other developed nations, with optimism for 2024 earnings projections despite recent quarterly earnings declines.

August is traditionally a vacationing month for Wall Street, with lower volumes and an absence of blockbuster deals. However, lower volumes do not necessarily equate to lower volatility. The month saw the S&P 500 Index decline more than five percent in the first three weeks before rebounding strongly in the final week, ending the month down 1.6%. That brought the year-to-date return of the Index to 18.7%. The market continues to be strongly bifurcated. Ten stocks have contributed 14.6% of the gain, while 201 companies are negative on the year, and 108 companies have declined more than 10% this year.

Perhaps the most significant market action during the month was in the bond market, where intermediate interest rates moved sharply higher. The 10-year Treasury started the month below 4%, broke through this cycle’s previous high of 4.3%, then retreated to 4.1% by month end, as the bond market continues to grapple with conflicting data about inflation and the economy.

Core personal consumption expenditures (core PCE), an inflation metric carefully watched by the Fed, showed signs of slowing, giving Fed watchers and investors hope that a further quarter-point rate bump might be delayed or avoided altogether. However, other inflation indicators were mixed, while gas prices edged upward. All of which produced a growing consensus that Fed rates would likely remain high for some time, a shift away from optimistic projections of rate reductions by year end.

Meanwhile, overall economic data remained generally positive, although the lag effects of the Fed’s rate hikes could still be mounting. A strong consumer continued to provide a boost for the economy, even as Covid-period savings appear to be running low. Mounting credit card debt continued to demonstrate the potential strains on spending. One key to consumer strength has been the strong job market, but that too was beginning to show signs of weakening over the past month.

Taking a wider lens, the U.S. economy remains stronger than other developed countries. A slowdown in China, which has global implications, has sparked central government stimulation. Bond yields exceeding 5% make fixed income the most attractive it has been since pre-2008, but stock returns so far this year are a reminder of where the best hedge against inflation and the greatest opportunity for real returns remain. Earnings projections for U.S. companies in 2024 are quite optimistic, even as the final reports from the second quarter of 2023 showed a year-over-year earnings decline of about four percent, marking the third quarter in a row of earnings declines. Debate continues on whether Q2 was the bottom for corporate earnings declines in this cycle. A conservative view of future corporate earnings suggests full valuation for the overall stock market. However, considerable variation by sectors and industries leads us to believe that careful security selection, matched with appropriate asset allocation, will be important factors in performance and risk management for the remainder of 2023 and into next year.

In this month’s Q&A, Bill Ford, Portfolio Manager and Credit Analyst on the Reinhart Fixed Income team, shares his view on the current state of the bond market. Bill dives into where he is finding opportunities and when he thinks interest rate hikes will start stressing corporate balance sheets.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in this report constitute the firm’s judgment as of the date of this report and are subject to change without notice.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

The Dow Jones Industrial Average® (The Dow®), is a price-weighted measure of 30 U.S. blue-chip companies. The index covers all industries except transportation and utilities.

The S&P 500® Index is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.

The S&P Midcap 400 is designed to measure the performance of 400 mid-sized companies, reflecting the distinctive risk and return characteristics of this market segment.

The Russell 1000® Index measures the performance of the 1,000 largest companies in the Russell 3000® Index, which represents approximately 89% of the total market capitalization of the Russell 3000 Index.

The Russell 1000® Growth Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit growth characteristics.

The Russell 1000® Value Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit value characteristics.

Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.

The Russell Midcap® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap® Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership.

Russell Defensive Indexes® measure the performance of companies that have relatively stable business conditions
which are less sensitive to economic cycles, credit cycles and market volatility based on their stability indicators.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

International Equities Definitions
The MSCI ACWI ex USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excluding the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

The MSCI EAFE (Europe, Australasia & Far East) Index is a free-float adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada.

Emerging Markets - MSCI Emerging Market Index – captures large and mid cap representation across 24 Emerging Markets (EM) countries. With 1,138 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.

China - MSCI China Index - captures large and mid cap representation across China A shares, H shares, B shares, Red chips, P chips and foreign listings (e.g. ADRs).

Japan - MSCI Japan Index - is designed to measure the performance of the large and mid cap segments of the Japanese market.

Germany - MSCI Germany Index - is designed to measure the performance of the large and mid cap segments of the German market.

United Kingdom - MSCI United Kingdom Index - is designed to measure the performance of the large and mid cap segments of the UK market.

India - MSCI India Index - is designed to measure the performance of the large and mid cap segments of the Indian market.

Fixed Income Definitions
Government Bond - Bloomberg US Government Index - measures the performance of the U.S. Treasury and U.S. Agency Indices, including Treasuries and U.S. agency debentures. It is a component of the U.S. Government/Credit Index and the U.S. Aggregate Index.

Municipal - Bloomberg U.S. Municipal Index - covers the USD-denominated long-term tax exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds and prerefunded bonds.

U.S. Aggregate Bond - Bloomberg U.S. Aggregate Bond Index - is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, mortgage backed securities, asset-backed securities and corporate securities, with maturities greater than one year.

Investment Grade Corporate - Bloomberg U.S. Credit Index - measures the investment grade, US dollar-denominated, fixed-rate, taxable corporate and government related bond markets. It is composed of the US Corporate Index and a non-corporate component that includes foreign agencies, sovereigns, supranationals and local authorities.

High Yield - Bloomberg U.S. Corporate High Yield Bond Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Bloomberg EM country definition, are excluded.

Weighted Avg. Market Cap: measures the size of the companies in which the portfolio invests. Market capitalization is calculated by multiplying the number of a company’s shares outstanding by its price per share.

Price-to-Earnings (P/E) Ratio: measures how expensive a stock is. It is calculated by the weighted average of a stock’s current price divided by the company’s earnings per share of stock in a portfolio.

Dividend Yield: the portfolio’s weighted average of the underlying portfolio holdings and not the yield of the portfolio.

A basis point is one hundredth of a percent.