Key Points:
- September was a challenging month for US stocks as the S&P500 experienced its worst loss of 2021.
- Political uncertainties in the US are causing anxiety among investors over taxes, the debt ceiling, and a $3.5T spending plan.
- A default in China’s biggest property development companies spooked global fixed income investors and a flight to safety.
Markets were a bit rocky in September as concerns over inflation, disfunction in Washington, lower economic growth expectations, and increasing interest rates weighed on risk appetite. The S&P500 suffered its worst month of 2021, losing 4.65% in September. Energy stocks were the only positive sector, gaining 9.44% following steep increases in oil and natural gas prices. Supply chain issues from the lockdowns are still lingering across the globe and weighing heavily on production. Tight inventories in everything from automobile computer chips to natural gas in Europe to coal in Chinese electricity production are causing high prices and limited availability for many consumer goods.
A host of uncertainty in Washington is causing anxiety for investors: the debt ceiling struggle, a huge infrastructure bill, potential tax increases, Fed tapering, and the future level of interest rates if inflation remains high. Currently, the Federal Reserve is buying $120 billion a month of Treasuries and mortgage-backed securities to provide liquidity caused by the Covid pandemic. They will gradually be “tapering” these purchases in the coming months as that level of stimulus is not longer required. This may cause yield to move higher as economic growth and inflation expectations remain high. As interest rates rose in September, bond prices fell with the Barclays US Aggregate Bond Index posting a -0.87% return.
International stocks held up better than the US with the MSCI EAFE Index losing 2.9%. Evergrande, one of the largest property developers in China, missed debt payments and caused global concern over its potential ripple effect across fixed income markets. Chinese stocks dropped 5.02% during the month and are down 16.67% for the year. Latin American stocks were also hit hard dropping 10.34% as higher inflation and the stronger US dollar weighed on their local currencies. Russia (+6.34%) and Japan (+2.75%) were among the strongest equity markets for the month.
The remaining months of this year could continue to be volatile, but an improving labor force and strong corporate earnings could alleviate some of those fears. Investors should continue to remain diversified and focus on long-term fundamentals in time of short-term uncertainty.
Sources: Morningstar Direct, Wall Street Journal, Guggenheim, BlackRock