September Market Review

A good month in September with most major financial assets in positive territory, except for Europe.

• S&P 500: +2.02%
• Nasdaq: +2.48%
• Stoxx Europe: -0.41%
• All Country World Index EUR: +1.68%
• Global Fixed Income Index EUR: +0.87%

Why did Europe end in negative territory?

The sector that fell the most was healthcare, which represents 17% of the Stoxx Europe. The main culprit was Europe’s largest pharmaceutical company, Novo Nordisk, which dropped 16% in September due to several investigations in the United States related to insulin reimbursements. Another sector that fell significantly was the automotive sector, which also carries substantial weight in Europe.

What can we highlight from what happened in September?

I believe there are three key issues that affected and will continue to affect the market in the future:

1. The FED (U.S. central bank) lowered rates by 0.50% to the range of 4.75% – 5%.

This interest rate is called the Federal Fund Rate, and it is the rate at which banks lend to each other overnight. It’s the tool the FED uses to influence monetary policy, meaning it can make borrowing more expensive to curb economic growth when inflation is rising, or make borrowing cheaper to stimulate bank lending.
It is a reference for other loan interest rates, such as mortgages, car loans, credit cards, student loans, etc. That’s why it’s so important, as it influences our consumption and investment decisions. The FED and other central banks do not decide long-term interest rates, which move according to investor buy-sell activity, including that of the central bank itself.

A lingering question in the market is: why lower rates by 0.50% now when the economic data isn’t bad, inflation is still above the 2% target, and they even said there would be no recession? Additionally, the first rate cut is 0.50% instead of the usual 0.25%. At other times, this would have led people to believe the FED saw significant economic risks to justify a cut of this magnitude.
Many have speculated that the reason could be the upcoming elections in November. It would be disappointing if this were the case: that such a powerful entity (which has a monopoly on money printing¹) that is legally independent would make decisions affecting millions of people for political reasons, like helping someone win an election. I don’t care what party they belong to, they almost all do it.

Savings are key to a country’s development as they allow:
• The financing of investment projects that create value and jobs.
• Savers to make returns on their savings to cover future needs, such as their children’s education, addressing social needs, etc.

This chart shows the importance of savings in increasing wealth and, therefore, in reducing poverty globally.

Source: Prepared by the company

If we lack certainty about the level of interest rates, we will be less willing to lend those savings. Therefore, if rate decisions depend on the needs of the politician of the day, there will be a risk of investment shortages.

What are the effects of an interest rate cut on financial markets?

Although a 0.25% cut had already been priced in, the effects are as follows:
• It benefits companies in the growth phase whose profits are not immediate.
• Fixed income rises with interest rate cuts. The price moves inversely to the rates. Remember that the central bank only controls overnight rates.
• It encourages borrowing, although that depends on the level of existing debt, which is already significant.
• It temporarily relieves those with variable-rate loans.

2. Strong stock market gains in China.
   The People’s Bank of China announced a significant fiscal and financial stimulus plan to try to support both the real estate market and the stock market, which have been falling for some time. Among other measures, they reduced the down payment required to buy a house from 25% to 15% of the value, and launched a stock purchase program worth 500 billion yuan (€65 billion). This last measure had never been taken in China before.

At least in the short term, the stock market reacted positively, with the Chinese stock market rising 20% in September. Allocating resources to a sector like real estate, which is already over-leveraged and with many companies in critical condition, carries high risk. Many real estate companies still have a backlog of empty buildings across China. If, instead of channeling resources into more productive sectors, they are poured into a sector that needs readjustment, it’s akin to throwing money away. We’ll see how this plays out.

3. Geopolitical tension.
   There’s a third point which, though listed last, is no less important. The situation in the Middle East is escalating, with Iran’s attack on Israel and possible reprisals. We hope this does not escalate further, and let us pray that the leaders making decisions that could affect thousands of lives act wisely and choose peace.

These types of events affect the market and are often hard to predict, except for the post-event forecasters who claim it was obvious that one should have invested in China or bonds. Even when events are predicted, their market effects may differ from expectations.

Investing involves uncertainty because it’s about the future. The best way to minimize uncertainty, though never eliminating it entirely, is to conduct thorough analysis of the assets being invested in. If this is done, and you fully trust your analysis, such events will not lead you to make hasty decisions. As St. Ignatius said, “In times of desolation, make no changes.

1. This is not entirely true. Commercial banks, thanks to the fractional reserve, can lend more than 90% of the money deposited in their clients’ accounts. If Peter deposits €1,000 in bank A, it can lend to John €900 that he will deposit in bank B, and this in turn will lend to James €800 that he will deposit in bank C. Therefore, there is €800 that has been multiplied by 3, basically €1,600 has been created out of nothing. The situation is that all 3 are owners of the same €800 ↩︎

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