Feared month for equities has so far delivered only a limited setback

Historically, September is one of the more challenging months for equity markets and this year the statistics have proved reasonably accurate. However, the setback has been limited and equity prices remain comfortably in positive territory for the year. This is despite a couple of turbulent weeks marked by renewed tensions surrounding Iran, rising energy prices and the first US interest rate hike since 2023.

High energy prices, geopolitical unrest and sharply rising interest rates in the US and the rest of the world have attracted considerable attention and made headlines in recent weeks. However, while higher interest rates are increasingly putting pressure on public finances in the US as well as in countries such as England and France, businesses and equity markets have so far emerged relatively unscathed from the turbulence.

Tine Choi Danielsen, Chief Strategist at PFA, explains:

“It is said that when the bond markets sneeze, the rest of the global economy catches a cold. However, judging by the equity markets, it has so far been a very mild cold. Admittedly, we are still below the record levels seen in August, but overall, the year has delivered solid equity gains in the US, Asia and Europe. This has also benefited PFA’s customers, with a typical customer who has 15 years until retirement currently seeing a return of around 8.5 per cent,” she says.

Expected interest rate hike was hard to avoid
So why have the equity markets not been affected more by the turbulence? According to the Chief Strategist, one reason is that companies continue to generate healthy profits while unemployment remains low. This helps keep consumption and growth on track and, according to the Chief Strategist, yesterday’s interest rate hike by the US Federal Reserve should also be viewed from this perspective.

“If consumer spending is to continue supporting growth, it is crucial that the Fed brings down inflation, which has long remained some way above its target of 2 per cent. Although consumers have remained resilient throughout the war in the Middle East, there is no doubt that higher energy prices in particular are eroding their purchasing power. If the Fed fails to bring down inflation, there is a risk that consumers will become increasingly cautious,” says Tine Choi Danielsen.

She also does not consider yesterday’s interest rate hike a significant threat to equities but emphasises that higher prices and interest rates are creating greater uncertainty going forward.

“US growth has largely been sustained by substantial business investment, which could come under pressure if interest rates continue to rise. The same applies to consumption, which is caught between two evils – higher interest rates or rising inflation. However, much of the turbulence is being driven by energy prices and if they fall back, I expect the economy to be strong enough to support equities for the rest of the year,” says Tine Choi Danielsen.