For all of the wild moves that equity markets have been going through this year, the month of September brought unexpected losses. Hope springs eternal but optimists are hard to find. Economic reports had been predicting a slow recovery, but September's data were particularly weak. Add in corporate warnings and a looming war with Iraq, and investors did not have much positive news in the month. For the second straight month, the FOMC met and left the federal funds rate target unchanged. Their adjoining statement emphasized a slow recovery and mentioned a weak economy -- no help for equity prices. While this did give market players some sense that the Fed may lower interest rates soon, it seemed that equity investors continued to ignore the policymakers.

The month of September began with fresh batches of earnings warnings and major political tension regarding Iraq, and both of these events combined to send major indices down sharply. A pessimistic attitude regarding corporate profits remained prevalent throughout the month. Major indices finished the month lower as negative days far outweighed any positive trading sessions. Stock prices rallied slightly on several occasions, but on Sept. 18 the Dow lost the fight to stay above 8,000 points. There were some small bargain-hunting rallies, particularly in the first week of the month, but there were no days when the market enjoyed a strong rally with consistent positive momentum. The first trading day of the month, Sept. 3, saw the month's largest one-day drop, the first of several big-loss sessions in the month. The market recovered by Sept. 10 before steadily declining throughout the month.

The high and low levels for the month are highlighted in blue.

Stock prices in the technology sector showed narrow movement throughout the month, as positive earnings news was quickly followed by disappointment. Telecommunications stocks dipped further in the month but still didn't show much movement from August's levels. The retail sector began a slight downturn, as it seems that consumers are not as comfortable spending their money in stores. Energy stocks continued to trade well as oil prices continued their recent surge. Health care stocks performed slightly better after declining for much of the past three months. Housing-related stocks began to show some cracks, as housing figures declined slightly during September. Financials seemed to once again be the place to invest as this sector experienced nice gains throughout September. Leading investment banks continued to perform well. Travel and leisure stocks remained fairly stagnant, while the automotive sector declined slightly.

The high and low levels for the month are highlighted in blue.

Looking at the performance of major indices week-by-week, every week of September performed worse than the previous week. The best performances -- Sept. 4th, 6th, 25th, 26th -- benefited from strong earnings from major technology and financial stocks and followed days when the market posted big losses. The Dow closed on Sept. 10 at over 8,500 points, but by the 18th it was back under 8,000. If economic conditions do not improve, the 7,000-point mark may be tested soon. The NASDAQ also fell throughout the month, hitting a six-year low on the 25th. The Dow closed with a 12.4 percent loss, with the NASDAQ's decline reaching 10.9 percent. The Russell 2000 fell by 7.3 percent. The S&P 500 finished down 11.3 percent for September. The market-encompassing Wilshire 5000 index posted a 10.2 percent decline.

Treasury Markets:
Still Moving Along!
The Treasury market continued to move in the opposite direction from equity markets. Treasury securities traded slowly at the beginning of the month, but wound up September with price gains and historically low yields across the maturity spectrum. Economic reports, particularly those towards the end of September, showed a weakening economy and raised questions whether the recovery is dead. Weaker housing markets, weak labor markets, dropping consumer confidence, and a surprising contraction in manufacturing all helped Treasury investors in September.

While there were some negative trading days for Treasuries, it seemed that any concerns centered on the market becoming overbought. The Fed's decision to not drop interest rates initially caused some pessimism among Treasury market players, but most are pricing in an interest rate cut by the end of the year.

As can be seen in the chart above, yields continued to decline from the previous month's figures. Mid-month saw only slight declines from the end of the previous month, but the Treasury market rally really began in the days leading up to Sept. 30. The 30-year bond traded well throughout the month, shedding another 26 basis points from its yield. The 10-year note decreased by 59 basis points, while the 5-year note declined by 66 basis points. The 2-year note was able to pare another 47 basis points from its yield by the end of September. The 3-month bill showed some movement after remaining fairly stagnant in past month, closing with an 11-basis point decline in its yield. Yields are now at or near historical lows across the curve.

Damir Fonovich, Economist, Econoday