Perhaps in many places, having your own washing machine is standard. In NYC, that’s not the case. So you learn to hoard your quarters, especially because many places of laundry are not on a new card system. Finding a quarter becomes as precious as finding gold, bartering for much more than $0.25 worth of anything when all you need is just. one. more. to start the machine.

I thought about this as I reviewed the market’s quarter end. Investors would have liked just one more quarter of positive returns to feel this market was on secure footing, given the double digits it had increased earlier in the year. But August, and especially September said, sorry dawg. And to be fair, September has, more often than other months, not been a great month for market performance. 

While we called for a tough market in August and then a tough September, it doesn’t make it any more fun. Looking below the surface and at why markets may have suffered, I believe it’s directly related to the rise in two things: oil prices and longer-term interest rates. Neither of these are good for markets.

Oil prices, as measured by West Texas Intermediate (WTI), rose from around $70 at the beginning of July to over $90 at the end of September. Higher oil prices usually translate to higher gas prices at the pump, costing us drivers more. In fact, on a national level, according to the U.S. Energy Information Administration (EIA), retail gas prices went up by $0.30 a gallon between June and September. 

And perhaps more impactful to falling stock prices, 10-year treasury yields rose from 4%, at the end of July, to over 4.5% at the end of September. Higher interest rates not only mean borrowing money costs more, but can drive stock valuations lower since it is used as a cost input when estimating stock prices (see my explanation on this here). The growing US deficit is not helping here either.

Relatedly, energy stocks, those companies that produce and sell oil, for example, fared the best, with the S&P 500 Energy Sector Index up +2.6% in September and +12.2% for the quarter. While the very interest rate-sensitive real estate sector (REITs) fared the worst, falling -7.25% in September and -8.9% for the full quarter. As has been said by Cramer; there’s always a bull market somewhere, you just have to find it. Kind of a plug for diversification.

So with all this said, what will the next quarter bring? The fourth quarter has historically been better for markets. I think it’s possible we see both oil prices and yields calm some over the next few weeks, providing some relief. In addition, I expect earnings season, which kicks off at the end of next week (October 13), to provide some near-term positive sentiment to counter some of the tougher headlines that have been around. All leading to a potential near-term (next few months) rise in the markets.

But I don’t expect to see new highs (S&P 500 would have to go above 4600). That’s because there are still a number of things that, individually, would be manageable but, together, make for a potentially tense end to this year, or beginning of next year. These are the restart of student loan payments, the various strikes taking place, government budgeting and shutdown noise, and perhaps most importantly—growth headwinds from the lagged effects of policy tightening (aka Fed rate hikes). 

The Fed has raised rates by quite a bit, but, as explained last week, it takes time for this to make an impact on growth (and, as a result, inflation). It does this by making borrowing cost more for people and companies. And I think we are starting to get there. Looking at data from the Bureau of Economic Analysis, the below chart shows what % of disposable income goes to interest payments (excluding mortgages) since 1960.

While this is not back to levels seen in 2007, 2000 or 1986, it is heading higher (and, P.S., those were all several months before a recession and bad market). This is yet another reason my alerts are up, as I described last week. 

But until then, we may still get a good quarter—one worth savoring for when they are hard to find.