Market Update October 18, 2021
After a rough end to the third quarter, stocks have clawed back this month helped in no small part by Congress kicking the debt ceiling can down the road another two months. While this action was not overly encouraging given this situation still needs to be resolved, it was an agreement nonetheless by our fractious government and reassured the markets.
September’s performance by the S&P 500 was its worst monthly showing since March 2000, down 4.7%. This was a reminder for investors that stocks can be volatile at times. This index did manage to eke out a small gain for the quarter (up 0.6%) to bring its string of positive quarterly returns up to six. While foreign stocks held up a little better than domestic in September, their quarterly returns were negative. The MSCI EAFE index of established foreign economy stocks was down slightly (-0.5%), and the MSCI Emerging Markets index was down sharply (-8.1%). The emerging market index was heavily weighed down by China which comprises one third of the index. Stocks in China have been shaken by the debt default of Evergrande, the world’s most indebted property developer, and a push by China’s government to reduce leverage in the real estate sector. New regulatory restrictions have also weighed on stocks there.
Bonds were of little help to investors’ portfolios in September as rising bond yields reduced prices due to their inverse relationship. The Bloomberg US Aggregate index was down almost 1% in September and was virtually unchanged for the quarter. The yield on the 10 year Treasury bond has been on the rise again since early August and yielded 1.58% as of October 15th. While many central banks around the world have been easing monetary stimulus measures and raising interest rates this year, the Federal Reserve and European Central Bank have been two notable exceptions. Bond yields in Europe and Japan remain well below those here in the U.S. and foreign investors should provide buying support for Treasuries and help keep a lid on interest rates.
Inflation is still a hot topic and the Federal Reserve seems to be coming around to the possibility that it may not be as transitory as they anticipated. Recall that low supply plus high demand equals price inflation. While many of the materials shortages and transportation bottlenecks should be short lived, the labor shortage impact is another matter. Wages are rising sharply and these invariably find their way into prices. Also, demand for goods and services remains strong and is likely to get a second wind with the Covid crisis appearing to have peaked both globally and nationally over the past few months. The Fed is expected to soon begin reducing their economy-stimulating bond purchase program and begin raising interest rates next year.
I can make a long list of things that could derail the financial markets. That said, quite often it is an unexpected event that rattles the economy and markets. There is a term that has been used in the financial press for over a year now that may best explain the stock markets’ positive behavior these past eighteen months. TINA is an acronym for “there is no alternative,” meaning stocks afford the best opportunity among financial assets for long-term growth. Until bond yields become more attractive, perhaps there is no better alternative than stocks. While many segments of the markets are unattractive to me, I believe there are others that offer us good value.
I wish you and your family a wonderful fall and holiday season. Do not hesitate to reach out to me if we might be of assistance.
Sincerely,
Glenn S. Rank, CIMA®
Certified Investment Management Analyst®
President
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· The S&P 500 is an unmanaged index of 500 widely held stocks that’s generally considered representative of the U.S. stock market. The MSCI EAFE index and the MSCI Emerging Markets index are unmanaged indexes compiled by Morgan Stanley Capital International that are generally considered representative of the developed international stock market and emerging international stock market, respectively. International securities involve additional risks including currency fluctuations, differing financial accounting standards, and possible political and economic volatility, and may not be suitable for all investors. Investing in emerging markets can be riskier than investing in well-established foreign markets. Investing in small cap stocks generally involves greater risks, and therefore, may not be appropriate for every investor. The Bloomberg US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate term investment grade bonds traded in the U.S.. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index and index performance does not include transaction costs or other fees, which will affect actual investment performance. Individual investor’s results will vary.
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