U.S. stocks experienced a sharp decline on Friday, September 15^th, 2023, influenced by rising Treasury yields and a softening of stock performance during a week marked by notable inflation indicators.  

These included the August core Consumer Price Index (CPI) and the Producer Price Index (PPI) for final demand, both of which exceeded expectations. However, retail sales managed to outperform projections. 

Meanwhile, consumer inflation expectations for the upcoming year fell to their lowest in over two years even as crude oil rose for a third consecutive week and gasoline prices surged. 

Adding to the market’s risk-off sentiment is the historic UAW auto strike, the first time in the union’s 88-year history that all three major automakers were simultaneously targeted. 

Chip equipment makers such as Applied Materials, Lam Research and KLA Corp. all witnessed declines of more than 4%. This decline followed a report indicating that Taiwan Semiconductor was delaying deliveries, raising concerns about weak consumer demand.  

While the market has already priced in a September pause at a 95% likelihood, the chances of a November rate hike stand at 65%. This indicates that a shift towards rate cuts may not occur as swiftly as anticipated. 

During the week, the Dow Jones Average managed to eke out a modest gain of 0.1%. In contrast, the S&P 500 and Nasdaq Composite both experienced their second consecutive week of losses, with declines of 0.2% and 0.4%, respectively. 

Here are the closing levels on Friday, September 15^th, 2023: 

The market had its reasons for optimism, including the decrease in forward inflation expectations. However, this week appeared somewhat different, possibly due to the recent uptick in yields and the price of crude oil hovering around $90 per barrel. 

Friday also happened to be triple witching, where futures, stock options and index options all expire, which may have influenced volatility and pricing. 

Regardless of the driving factors, the market seems to have been responding more sensibly to data and market conditions lately. 

Warnings of higher interest rates and their effects have fallen on deaf ears for quite some time. If demand is slowing, job growth is tapering, and inflation remains below the Federal Reserve’s target, there is a good case for more downside for stock markets. 

Investors will need to assess whether the risks associated with a hard landing are accurately priced.  

Currently, the majority are expecting a soft landing or no landing at all. Consequently, it may be an opportune time to implement effective strategies to hedge against downside risks. 

Source: CBOE, Bloomberg 

This commentary is written by James Gomes, a seasoned finance industry veteran with extensive experience of over 30 years, including a substantial tenure at a reputable U.S. bank exceeding 20 years.

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