The Coming Months Could Be Tougher on Investors

September is considered the toughest month of the year for stockholders, while stock prices tend to rise during most of the other months, according to a report by the British newspaper "The Economist."

The newspaper pointed out that asset prices should only change in response to real and effective data, such as cash flows, and traders should identify and exploit expected fluctuations while balancing them. However, what happened in September 2023 is that investors learned, or rather accepted the fact that interest rates would remain high in the long term.

The newspaper explained that the reason behind this decline was a rapid series of monetary policy announcements that began with the US Federal Reserve on September 20th of last year and ended two days later, including 11 central banks, nearly all of which reiterated the message of "let interest rates be higher for longer."

The European Central Bank also raised interest rates and talked about a long race. On average, Federal Reserve officials expected the benchmark interest rate (currently 5.25-5.50%) to remain above 5% by the end of 2024.

As for the bond market, this is just a confirmation of summer expectations. The yield on two-year Treasury bonds, which is considered sensitive to short-term policy expectations, rose from 3.8% in May to 5.1%. Furthermore, longer-term interest rates increased, with the yield on ten-year Treasury bonds reaching 4.6%, its highest level in 16 years.

This was not limited to the United States alone, as yields on German 10-year bonds reached 2.8%, the highest level since 2011.

Meanwhile, British bond yields are approaching the level they reached last autumn, which was only reached then amid cheap sales and market turmoil.

On the other hand, the dollar strengthened due to the strong US economy and expectations of higher growth compared to other countries. The dollar index has increased by 7% since its lowest level in July of last year.

The newspaper mentioned that the stock market has been slow to absorb the possibility of continued interest rate hikes compared to the bond and foreign exchange markets, as borrowing costs are not their sole driving factor.

Investors have shown enthusiasm, the newspaper adds, about the potential of artificial intelligence and the flexible US economy. In other words, the rapid profit growth potential might explain the prosperity of the stock market even in the face of tight monetary policy.

The newspaper concluded that investors have not yet realized that interest rates will simply remain high as long as bond market expectations indicate that and central bank governors insist on it. If this is indeed the case, the next few months may be even tougher.