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September Market Summary: Hostage to Headlines?

The equity markets started with their accustomed panache and then quickly succumbed to the September Scaries – September has a reputation for being the worst month of the year.

Fall leaves on tree

September Recap and October Outlook

The equity markets started with their accustomed panache and then quickly succumbed to the September Scaries – September has a reputation for being the worst month of the year. According to S&P Global, the month averages a decline of .99% and is negative 53.8% of the time. However, this one hit a little harder for investors, as the 4.76% decline was the worst since March 2020.

Despite some positive data releases, the combination of the ongoing Delta surge and the likelihood of an earlier rate increase spooked markets. The switch to risk-off meant that 10-year Treasuries ended the month above 1.50% for the first time since June, but the potential positive of the Fed’s tapering announcement was tempered by uncertainty around the Build Back Better plan.

Let’s Look at Some Highlights

Inflation Came in Under Expectations

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index rose by 0.3% in August, against consensus expectations for an increase of 0.4%, marking the slowest growth in seven months. The annual rate of inflation declined to 5.3% in August, from 5.4% in July, marking the first decrease since last October.

However, most categories rose, if by a small amount. The decline in the rate was largely pegged to decreases in used vehicles, auto insurance, airfare, and hotel rates. The fall in used car prices was expected after increases this spring, but airfare and hotel rate slippage is likely linked to the Delta surge.

And Consumers Unexpectedly Held the Line

The U.S. Census Bureau reported an increase in August retail sales numbers of 0.8%. The Dow Jones estimate was that they would fall by 0.7%. Excluding autos, the numbers look even better at an increase of 1.8% versus the Dow Jones estimate for a 0.1% gain.

And Then the Fed Met, and Powell Held a Press Conference

At the Fed’s September meeting, Chairman Powell indicated his goals on employment and inflation are coming into view. Powell said that “Inflation has achieved… substantial further progress” and that he believes the same test for employment is “all but met.” The impact of that was seen in the Fed’s “dot plot,” which indicated that more members see the rate hike happening in 2022, as opposed to the June meeting when a slight majority of members put the rate increase in 2023. Core inflation is now projected to increase 3.7% this year, compared with the 3% forecast in June.

Chart of the Month The Fed revised 2021 GDP down from the 7% level seen in June, but the projection is still the highest level of GDP seen since the 1980s.

FOMC Median GDP Projections, September 2021
FOMC Median GDP Projections, September 2021

Equity Markets

  • The S&P 500 was down 4.76% in September bringing its YTD return to 14.68%

  • The Dow Jones Industrial Average fell 4.29% for the month and was up 10.58% YTD

  • The S&P Mid-Cap 400 decreased 4.09% for the month resulting in a 14.48% YTD return

  • The S&P Small Cap 600 lost 2.96% in September, raising the YTD return to 19.01%.

Source: All performance quoted from S&P Dow Jones Indices.

In an exact reversal from last month, only one of the eleven S&P 500 Index sectors was positive. Energy didn’t hesitate to rub it in and besides being up 9.28% for the month, marked 38.35% year-to-date as the best performer in the index. For the other ten sectors, the ranking is just about which sector declined less than everyone else. Financials declined least and held onto a gain of 2.29% for the quarter. Consumer Discretionary declined 2.62% but stayed just positive for the quarter at 0.15%.

Bond Markets

The 10-year U.S. Treasury rate is still below the levels seen in March, but the 5-year rate reached its highest level since February 2020, as the Fed indicated that tapering of asset purchases will likely begin at the November meeting and will conclude by mid-2022. The Fed’s official numbers for growth and inflation projections for 2022 and 2023 increased, and the market appears to believe, as reflected in prices, that the Delta surge will be brought under control. Most of the inflation concerns are centering around supply chain disruptions, which also are still considered temporary.

The Smart Investor

As would be expected, given the continuing drama around the passage of both the infrastructure bill and the Build Back Better Act, volatility is back in the game. The Cboe VIX Index, the so-called “Fear Index,” was recently at 23.51. For this forward-looking index, a value below 20 generally indicates stable, stress-free markets, and a value above 30 means large volatility ahead. This could even out quickly, with the passage of legislation before Congress and fourth quarter earnings season ramping up.

On the fixed-income front, 10-year Treasury yields are likely to continue to climb – but investors should factor in inflation. Even if rates hit 2% next year, inflation put real long-term bond rates in the red.

Reviewing portfolio assets to ensure that your income needs are met and that you can withstand potential volatility always makes sense. As we get towards the end of the year, looking at your portfolio with an eye on taxes and income levels may yield some opportunities to strategically sell and realize losses that can offset some gains from this (hopefully) strong year overall.



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