The month of September lived up to its billing as a historically challenging seasonal period for equity markets as major U.S. indices slid lower again last week and closed out with the worst monthly performance of the year. The S&P 500 notched a fourth straight weekly decline with a loss of 0.7% last week, while the Dow Jones tumbled 1.3% and the Nasdaq Composite managed to break even. Last week’s losses brought the S&P 500 return to a 4.8% loss for September and a 3.3% loss for the third quarter, but its year-to-date gains still stand at a strong 13%. One of the recent market worries was pushed down the road over the weekend as Congress passed a last-minute bipartisan spending bill to avert a government shutdown and keep the government funded for 45 days through mid-November.

Surging long-term interest rates are one of the main culprits in the latest bout of stock volatility as financial markets have increasingly fallen in-line with the Federal Reserve’s stance that rates will need to be held higher for longer. The 10-year Treasury yield rose to 4.57% to close out September compared to 4.09% a month ago and is drifting higher still in this week’s early trading. Rising interest rates can pose a headwind to stocks as a higher discount rate reduces the present value of future earnings, and safer, higher yielding bonds become more appealing as an investment alternative relative to higher-risk assets. Additionally, rising interest expenses can cut into profit margins, slow investment activity, and increase the risk of failure for highly leveraged businesses.

While long-term rates are drifting higher, last week’s release of August PCE (Personal Consumption Expenditures – the Fed’s preferred inflation gauge) gave more merit to the argument for no more additional hikes this year as core inflation again surprised to the downside. Core PCE inflation rose just 0.1% in August, a tenth below the 0.2% consensus, for a 3.9% year-on-year increase. It was the third consecutive month of slow core inflation data, which is an encouraging trend ahead of the Fed’s next policy meeting in November.

With the third quarter officially in the books, investors will soon be turning their attention to corporate earnings season as the flow of quarterly results begins next week. According to FactSet, the S&P 500 is expected to have generated earnings per share growth of less than 1% in the third quarter compared to a year ago, but growth is expected to accelerate in the fourth quarter and into next year with forecasted 2024 earnings up 12% over this year, which may be an optimistic bar to clear.

In the week ahead, market participants will be closely monitoring updates on the employment picture with the August Job Openings and Labor Turnover Survey (JOLTS) and the monthly jobs report for September headlining the week. U.S. job gains are expected to continue moderating with the consensus economist forecast expecting 157k net new nonfarm payrolls added to the economy last month compared to 187k in August.