The third quarter proved to be a topsy turvy ride for investors. After starting strong, markets struggled in September, giving back most if not all their gains. The oft-quoted phrase, “history doesn’t repeat itself, but it often rhymes,” attributed to Mark Twain, rang true this year.
September is historically the worst month for U.S. stocks.
Since 1926, September is the only month with an average negative return (-0.7%) as measured by the S&P 500 index. Inflation worries, debt ceiling concerns, and the COVID surge caused by the Delta variant were contributing factors to the September pullback.
U.S. large cap stocks (S&P 500) pushed ahead more than 5% in July and August. Then, in September, the wheels seemed to come off as the market wiped out nearly all the gains in just a few weeks. The S&P 500 ended the quarter with a positive return of 0.58%. The Russell 2000 index, a proxy for U.S. small cap stocks, ended the quarter down more than 4%.
Foreign stocks didn’t escape the wrath of September, either. The MSCI EAFE index, a proxy for foreign developed country stocks, ended the quarter with a negative 0.45% return.
The struggle was not confined to equities. After declining precipitously in the second quarter, the U.S. ten-year treasury rate found some footing and then began to climb. The big push came in September, as the rate increased 18 basis points to close the month at 1.49%.
Investment Grade bonds (Bloomberg Barclays US Aggregate Bond Index), gave back nearly all their gains from July and ended the quarter with a positive 0.05% return. The less rate-sensitive corporate high-yield bond asset class (Bloomberg US Corporate High Yield Index), returned 0.89% in the quarter as spread tightening outweighed the effects of climbing rates.
The global economic recovery remains underway but uneven due to differences in vaccination rates and COVID restrictions. According to the International Monetary Fund (IMF), global economic growth is expected to be 6% in 2021 before declining to 4.9% for 2022. If this growth is achieved, it will be the fastest in at least a generation, or possibly two. Typically, the IMF classifies global economic growth above 4% as an economic boom, and it is extremely rare for global growth to exceed 4% two years in a row. Since
mid-2021, global GDP had not only surpassed pre-pandemic levels, but it was within a few percentage points of pre-pandemic trend levels for economic activity.
There are headwinds that could dampen this growth, ranging from geopolitical fallout to stagflation. Fears of contagion from the Chinese property sector, specifically Evergrande, seem to be contained. Inflation, or worse, stagflation, remains a concern as supply-chain disruptions continue across the globe. In the Eurozone and U.S., inflation rates are at record levels as soaring energy prices and a demand-supply imbalance have pushed inflation higher. Inflation is a concern for central banks across the globe.
In the U.S., the economic recovery has been strong and continues. The key macro theme remains inflation. The Personal Consumption Expenditure (PCE) inflation gauge, the preferred Federal Reserve measure, reached a 30-year high in August at 4.3%. While still seen as transitory, inflation will not abate until supply chains improve the demand-supply imbalance. Supply chain improvement will come as labor markets gain strength.
The U.S. has added 5 million jobs this year, and the unemployment rate has declined from 6.7% to 4.8% through the end of September. The consensus belief is labor market improvement will continue as the Delta variant surge abates and restrictions are loosened and/or eliminated.
The market volatility over the past 18 months demonstrated the need to develop and follow a long-term investment plan. Advisors enhance their value by helping investors develop and then stick to the plan. This is our goal at Regency.
If you have questions or need help staying the course, please contact your Regency Advisor.