CIO's Market Watch - September

Higher or lower?

Last month the first item on the Market Watch agenda was interest rates and it retains top billing this month. In the US, the Federal Reserve (Fed) cut interest rates for the first time in September since December 2024. It was well flagged, whilst in the UK, the Bank of England did not do so, it is a tale of two different economies.

The US economy is marching along quite nicely, well, I think it is. The most closely watched employment data, the Non-Farm Payroll, for September was due to be announced at 8.30am (EST) on Friday 3 October, however, due to the US government shutdown, the data was not released and we don’t know when it will be. To say the least, that’s an odd state of affairs for the largest economy in the world.

It does seem however, that, other than employment data that is mixed, with longer term unemployed statistics high enough to be concerning and fewer jobs being created, that the economy is in decent shape. The other concern is that inflation is more resilient than hoped. However, the Fed has balanced its view to be more in favour of providing support for economic growth and jobs, than worrying about inflation, hence the cut in interest rates.

In the UK, it is a different problem, the Bank of England is still battling inflation, which is not showing any signs of coming back towards desired levels. As a result, interest rates were not cut in September, even though there is very little doubt that the economy could do with the stimulus.

Looking ahead there is a very good chance of more rate cuts in the US this month and in December, then through the spring and summer of next year, whilst in the UK that is not the case, with only a very modest fall anticipated; of course, that could all change very quickly, subject to the budget.

Meanwhile, elsewhere, the globally important Chinese economy has been showing signs of strength and we should expect the authorities to provide support, whilst France seems to be muddling through political turmoil and budget issues, with the economy performing surprisingly well.

Equity markets continued their good performance in September.

It was a good third quarter for equity markets. The chart below shows returns over the 3 months, in sterling terms, with September being positive. The US led the way, with the S&P 500 Index rising by nearly 10%. It is such a large part of the world equity market that it drove the MSCI World Index to be up by nearly 9%. The UK lagged, the FTSE All Share Index was up by 6%, but the FTSE 250 Index was only up less than 2%. This index represents medium sized UK companies which are typically more sensitive to the UK economy than large ones, which have more revenue from around the world.

Source: Bloomberg 09.06.2025 to 30.09.2025.

The performance information presented on this page relates to the past. Past performance is not a reliable indicator of future returns.

These numbers do hide a wide range of features. You can see from the chart, that although there was some unpredictability in the market moves, they were reasonably one directional. But within each of the regions there were big dispersions of returns, just like there were in the UK between larger and smaller companies.

Companies reported their revenues and profits for the first half of the year and provided guidance for the future; those that provided positive surprises often saw their share prices jump up and vice versa. Many of the giant US technology companies that are beneficiaries of the growth and uptake of AI, produced positive results and guidance, pushing markets higher.

It does feel like we are nearing a pivotal point in equity markets, can they carry on up even though they look expensive and there are many uncertainties around, inflation economic growth to the fore, or are we about to see a fall in markets as investors assess the outlook?

What next? A Wall of Worry or a Rope of Hope?

There is an old stock market saying that is worth dusting down; “Bull markets climb up a wall of worry, bear markets slide down a rope of hope”. A bull market is one that is rising and a bear market is one that is falling, there is no strict definition by how much, some suggest it’s a move of 10%, some say 20% before it gets named as such. It doesn’t really matter, it’s more descriptive than anything else.

The “wall of worry” refers to investors remaining cautious, even as prices rise whilst concerns over factors such as interest rates, inflation, economic growth, geo-political tensions and market valuations persist. A bit like this year so far really.

The “rope of hope” means investors cling onto the hope that the worst is over, but their hopes are dashed as the underlying issues persist and markets continue to fall.

So, which will it be? If only I could tell you! One thing I can tell you, though, is that there will be differences in how different markets and regions behave, there always is. What happened over the last 3 months is a good example of that.

I think it is just possible that all the bad news circulating in the UK of late relating to the weak economic growth, ongoing inflation, the parlous state of government finances and the huge tax rises that are likely to be unveiled in the budget in November, along with a very unpopular government and domestic social tensions is known and therefore reflected in the valuations of different asset classes such as bonds and equities. Of course, things could get worse, but the other side of that is; if all the bad news is known, then there might well be some upside to markets. Investors have been fleeing the UK equity market since the 2016 Brexit referendum; it now looks cheap by global comparison.

Similarly, the US equity market has been roaring along, leaving many other regions in its wake. Investors have been huge buyers of the US market since the worst of Covid. Could the opposite to the UK be the case there?

I think the final quarter of this year will be fascinating and it will be key to be nimble as an investor.