September has fulfilled its reputation as an ugly month for stocks, but traditional defensive sectors didn’t provide much in the way of shelter. Blame the bond market.
“The story for September is the story of rates, and with the 10-year Treasury yield pushing up, what we’ve really seen is a selloff in the rate-sensitive stocks in the market,” Rob Haworth, senior investment strategy director at U.S. Bank Wealth Management, told MarketWatch.
That helps explain why utilities, a bedrock defensive sector, were set for a monthly loss of more than 6% — the second-worst performance among the S&P 500’s 11 sectors just behind a more-than-8% decline for the similarly rate-sensitive real estate.
Utilities are viewed as a defensive play in part due to their high dividend yields, which means they trade in a manner similar to bonds. And with Treasurys and other bonds getting routed, bond proxies in the equity market were also set to suffer. Utilities also tend to carry high levels of debt, providing another avenue of rate sensitivity.
Through Thursday’s close, the S&P 500
SPX
was on track for a monthly loss of around 4.6%, while the Dow Jones Industrial Average
DJIA
has declined 3.1% and the Nasdaq Composite
COMP
retreated 6%. September is historically the worst month for equities.
Stocks remain up solidly in 2023, but back-to-back monthly losses and a surge in Treasury yields to 16-year highs will make for a jittery start to the fourth quarter.
Energy, meanwhile, is the sole sector that’s positive in September, with the Energy Select Sector SPDR ETF
XLE
up around 1.7% for the month. It’s also the only positive sector for the quarter, up more than 11% versus a 3.8% pullback for the S&P 500.
See: 4 reasons oil prices are surging toward $100 a barrel
That won’t come as a shock, given a rally by crude that took the U.S. benchmark
CL00,
this week briefly above $95 a barrel, while Brent crude
BRN00,
moved within a couple bucks of the $100-a-barrel threshold. Oil companies have rallied, with Exxon Mobil
XOM,
hitting a record on Wednesday.
Tight supplies of crude have driven the rally, amplified by Saudi Arabia’s production cut of 1 million barrels a day, which Ryadh recently extended through year-end. But gains may be harder to come by if demand for gasoline and other fuels slip in response to higher prices. Crack spreads — the difference between the price of a barrel of crude and the products that can be refined from it — soared this summer, but are now pulling back, analysts said.
At the other end of the performance spectrum, the utilities sector was down 6.8% this week, on pace for its worst week since September 2022, according to Dow Jones Market Data.
That may be a sign of “capitulation,” signaling scope for a rebound, Jeff deGraaf, chairman of Renaissance Macro Research, said in a Friday note.
“We view this weakness as potentially opportunistic to the long-side, how? There’s a point where returns are so bad, and risks so persistently high thru volatility, that they actually prove to be washouts,” he wrote.
Such setups aren’t perfect, but contrarian-oriented investors may be willing to take the other side, he said, noting that the last such capitulation signal in 2018 “proved very effective.”
For the market overall, much will depend on how rates pan out as the calendar flips to October and the fourth quarter, strategists say. A continued rise in rates and real yields will force a further rethink of stock-market valuations, while signs the recent runup is temporary could allow the bulls to get back on track.
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