Paul Tarins, RICP®,WMCP®,CSRIC™
September Recap: Slower Growth, Higher Inflation?
The summer quarter continued its relentless series of new record highs until mid-September rolled around, which broke the market's seven-month winning streak. The S&P 500 finished down a hard -4.7% for the month (‘SPY’ ETF proxy) and has continued its slide into early October. While the retreat may seem large, it has been such a positive year that this has only really taken the index back to mid-summer levels. Year-to-date, the index remains higher by +15.9%.
Why the pause? In addition to being well-overdue and within the most difficult seasonal period, a series of worries that had previously been ignored by markets came back to the fore, including:
- The Evergrande Chinese real estate developer default;
- A congressional US debt ceiling showdown;
- Persistent labor strains despite relatively high unemployment;
- Global supply chain and shipping constraints;
- Rising energy costs featuring oil at its highest level since 2014 (Yahoo!, “It's never been harder to create an outlook for the fourth-quarter...," 10.04.21)
- A string of high inflation reads with the consumer-price index up +5.3% for the twelve months through August, its highest level in 12 years (Wall Street Journal, “Broader Inflation Pressures Begin to Show,” 10.04.21);
- A minor surge in interest rates; and,
- Ever present concerns over the timeliness of Federal Reserve policy.
To the extent the later points may impact future growth, this upcoming earnings season could well set the tenor for the balance of the year. Keep a close eye on this, as early reports have indeed been lackluster. The good news there, is that expectations are muted so small wins may be rewarded after all. In addition to latent impacts of Covid-D (which thankfully appears to be waning), it is true that withdrawal of fiscal and monetary stimulus together will serve as a drag on periodic growth ahead, even if it remains net positive. Finally, recall that when it comes to inflation, whether current conditions are viewed as “transitory” or not, it is really future expectations that are the cause for concern.
As for countries, sectors, classes, and styles, emerging markets present the largest disconnect relative to the rest of the world, down -2.1% year-to-date (‘EEM’), weighed down by increasingly stringent Chinese social policies combined with concerns over the country’s highly levered real estate industry. Bonds were also negative on the month and remain modestly lower on the year. The Barclay’s Aggregate Bond Index was off another -0.9% (‘AGG’) in September, leaving it essentially flat for 2021. Global real estate was also hard hit, down -5.6% (‘RWO’) on the month, while commodities powered ahead +5.2% (‘DBC’) in September, now up an impressive +37.3% for year.
Global Asset Class Performances September 2021
Despite the apparent consolidation phase that markets have entered, we've yet to see the typical -6.5% retrace that tends to occur on an annual basis. Time will tell if October shall bring that investors way, but for now with the economy fundamentally sound, we expect the current corrective action to serve as a likely set-up for a traditional year-end rally.
Source: Index proxies based on ETF time-series data from CSI Data, Inc. Data deemed reliable, but not guaranteed. Past performance is no guarantee of future performance or profitability.
Paul Tarins is an investment adviser representative of and offers investment and advisory services through Portfolio Medics, a registered investment adviser. Nothing contained herein should be construed as a solicitation for investment advisory services. Sovereign Retirement Solutions and Portfolio Medics are not affiliated.