Mark Lister, 16 September 2022

September has historically been the worst month of the year for US shares.

Since 1950, the S&P 500 has (on average) declined half a per cent during September, and the market has been up just 44 per cent of the time.

It’s living up to its name in 2022, with a rocky finish to the third quarter of the year looming.

US stocks were down 4.3 per cent on Tuesday. That was the worst day since June 2020 for the S&P 500, and apart from the COVID recession period, the weakest since 2011.

Inflation worries were again the culprit, after a stronger than expected US consumer price index report for August.

We saw some big moves in US interest rates as a result. The two-year Treasury yield hit 3.78 per cent after the release, the highest since 2007.

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Life gets more difficult for higher-risk assets when investors can collect almost four per cent for virtually no risk.

This has also seen the greenback keep powering ahead, with the US dollar index hitting its highest levels since 2002.

The NZ dollar fell below US$0.60 during the week. Apart from a brief period during March and April 2020, that’s the lowest it’s been since May 2009, near the depths of the GFC.

Exporters won’t be complaining about that, as it keeps them competitive during an uncertain period.

It’s not a bad thing for local investors either. US stocks are down 17.2 per cent in 2022, although in NZ dollar terms the decline is a much more modest 5.6 per cent.

As is often the case during periods of volatility, the currency is proving to be a natural hedge against some of the offshore weakness.

If markets become more upbeat that will reverse, but for now it’s acting as an important shock absorber.

All of this makes for a very interesting set up ahead of the latest Federal Reserve decision, which will be released early on Thursday morning here in New Zealand.

Markets have been expecting another 0.75 per cent increase in the US cash rate, although there has now been some speculation we might see the Fed move by a full one per cent, or 100 basis points in financial lingo.

That would be very unusual, although not unprecedented. The last time the Fed raised interest rates by that much was in February 1989, and before that 1983.

Either way, the Fed Funds Rate will be 3.25 or 3.50 per cent by the end of this week, the highest since late 2007.

Having been slow to react to inflation pressures when they were building last year, nobody can accuse the Fed of sitting on its hands more recently.

It will have increased rates by at least three per cent in barely over six months, the fastest pace of tightening since 1981.

There’s not much investors can do but strap in and go along for the ride. We enjoyed a brief period of calm during July and August, but the ups and downs of this year don’t seem to be behind us yet.

Despite the murky outlook, those with plenty of time ahead of them must learn to view times like these as an opportunity. Periods that feel disconcerting often prove to be the times we look back on wishing we had been a little bolder.

That certainly doesn’t mean jumping in boots and all. Numerous challenges remain, and the volatility that has been so prevalent in 2022 might continue for some time yet.

Stay open-minded about using further weakness to your advantage, but apply a healthy dose of patience too.