The war with Iran upended markets this month. But not everyone got burned

By John Towfighi, CNN

New York (CNN) — It’s been a brutal month for bonds – but stocks have mostly shrugged off the turmoil.

Bond yields hit their highest levels in years, Brent crude rose back above $100 per barrel and central banks around the globe raised interest rates. Yet the S&P 500 is essentially flat this this month, up just 0.1% – a surprisingly calm performance given the pressure building elsewhere in markets.

There are tensions in markets as bond yields hit multi-year highs but stock indexes like the S&P 500 continue to shrug it off. The disconnect is raising questions about how long stocks can withstand the impact of higher bond yields and oil prices.

And bond volatility surged this month, raising concerns about dislocations arising in markets.

The end of September also marks the end of the third quarter, offering a chance to look back at the major trends shaping markets. Here are the biggest losers and biggest winners:

Losers

Bonds

Bonds have slumped, sending yields higher as investors grapple with concerns about inflation and tighter monetary policy. For the average bond fund, it has meant poor returns.

A Vanguard exchange-traded fund tracking the total US bond market is down 5% this year. Municipal bonds have also struggled: The iShares National Muni Bond ETF is down more than 6% this year.

Bonds are often considered the boring part of a portfolio. But as the Iran energy shock ignites inflation and prompts central banks to tighten, it’s complicating the outlook.

The rise in yields does have a silver lining: Bond funds are now cheaper than they were a few months ago. Yields are also at their highest levels in years, which can offer solid income for new buyers.

Cruise ships and airlines

The surge in fuel costs and interest rates this year dinged specific industries, putting some stocks in a slump. Shares of cruise ship companies are trying to claw their way out of a hole.

Norwegian Cruise Line shares (NCLH) are set for their worst quarterly performance sine the second quarter of 2022, after the onset of Russia’s war with Ukraine. Shares are down 34% this year, driven by a 30% drop this quarter.

Other cruise companies have felt the pain: Royal Caribbean shares (RCL) are down 16% this quarter, putting them down 5% this year. Carnival Corporation (CCL) dropped 13% this quarter and almost 20% this year.

However, Carnival reported earnings Tuesday and beat Wall Street’s estimates as strong consumer demand helped offset the impact of higher fuel costs. Analysts said the outlook remains solid, citing resilient consumer demand.

Airlines have also been roiled by the energy shock and surge in jet fuel costs. American Airlines shares (AAL) dropped 26% this quarter, putting them down 13% this year.

Precious metals

Higher interest rates may not have not knocked the S&P 500 off course, but precious metals have felt the pressure. Gold futures are down more than 5% this month, silver is down 8% and palladium is down 11%.

Precious metals have slumped as bond yields and central bank rates rose this month. Metals, which don’t pay income, can become less appealing when interest rates rise.

Winners

Big Tech

Technology stocks have kept the S&P 500 afloat.

The index is weighted by market capitalization, so the larger a company’s market value, the more influence it has. Big Tech stocks like Meta (META) and Microsoft (MSFT) rallied sharply this quarter, up 30% and 39%, respectively.

The S&P 500 is up more than 2.5% this quarter. But an equal-weight version of the S&P that gives each stock the same weighting is down 1.5%, highlighting the extent to which the market’s gains have been concentrated in tech.

The tech sector is up more than 5% this month, offsetting declines in most other sectors. Communication services, which includes Meta and Alphabet, is the only sector that has seen gains and is up almost 1%.

Energy stocks

The surge in oil prices this year has been a boon for companies in the energy sector. Higher crude prices can boost companies’ bottom lines and provide incentives for more production.

Phillips 66 shares (PSX) are up 50% this quarter and 90% this year. Chevron shares (CVX) are up 23% this quarter, ConocoPhillips (COP) has jumped 21% and ExxonMobil (XOM) has risen 18%.

The energy and technology sectors are the two top-performing sectors in the S&P 500 this year.

Bitcoin

With all the moves in oil, bonds and stocks, one asset had an unexpectedly strong quarter: bitcoin.

The cryptocurrency has rallied more than 40% this quarter, rebounding from a slump and rising as high as $86,500, its highest level since January.

Bitcoin rallied despite headwinds for the broader crypto industry after the CLARITY Act failed to pass the Senate.

Still, bitcoin is well below its record high from nearly a year ago, when it topped $126,000.

Where do we go from here?

Eight months into the Iran war, investors are reckoning with major shifts in the economy and financial markets. Diesel prices have hit record highs and long-term bond yields are at their highest levels in decades. Still, the economy has been resilient and corporate profits remain robust.

After falling by 5% in the first quarter and rallying 15% in the second, the S&P 500 is set to end the third quarter with a gain of 2%. That would leave the benchmark up 12% this year, on track for a fourth-straight year of double-digit gains.

But those headline numbers are masking a more complicated market.

Technology continues to prop up the S&P 500, even as other parts of the market are showing weakness. For an investor holding standard funds, returns remain solid this year, with the benchmark up more than 10%.

Bonds are a different story. They have taken a hit, and their outlook depends on the path of oil prices and interest rates. The correlation between oil prices and the 10-year Treasury yield is at its highest level since the 1990s, according to Cboe Global Markets, highlighting just how important the energy shock has been for the broader market.

Wall Street’s focus for the remainder of the year is on two more Fed rate decisions, another round of corporate earnings and developments in the Middle East.

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