September Market Update

September 10, 2021 | Mark Borda, CPA, CFA
Portfolio Manager

The U.S. economy and stock market wrapped up the summer in style, continuing its strong rebound from the pandemic-related lows in 2020. Year-to-date through the end of August, the broader stock market, as measured by the S&P 500 Index, reported a total return of 21.5%, including dividends, fueled by a torrent of monetary and fiscal stimulus and corporate earnings growth. Additionally, the Dow Jones Industrial Average, including dividends, and Nasdaq Composite increased 18.4% and 17.0%, respectively.

The yield on the 10-Year U.S. Treasury Note increased from 0.93% at December 31, 2020 to 1.30% as of August 31, 2021. As a result, the total return, including interest received, for the Barclays US Aggregate Bond Index declined 0.69% year-to-date through August.

The broad story remains that the U.S. economy is in the midst of a powerful recovery from a deep recession brought on by the pandemic, and the U.S. stock market continues to follow suit; however, the next “leg” of any stock market advance will be increasingly demanding as major headwinds continue to loom.

We view the most significant risk to the current expansion to be higher-than-expected inflation, which is a byproduct of combining pent-up consumer demand with a strong economy, supportive monetary and fiscal policies and robust corporate profits. We’re also closely monitoring:

  • The potential for higher corporate and personal tax rates to negatively impact future corporate earnings
  • Economic/earnings/sentiment conditions and,
  • The recent increase in COVID-19 Delta variant infections

The daily reported case-count of Delta variant infections has drastically increased during the last several months through August. While hospitalizations and mortality rates remain well-below levels in 2020, there has been clear consequences to the economy as seen in consumer confidence and job readings for August that were both weaker-than-expected. We’ve also noticed executive commentary from certain pockets of the market that are reporting a recent moderation in activity from customers (e.g., airlines). In fact, the impact from the Delta variant caused the Atlanta Fed’s GDP Now model, which is a running estimate of real GDP growth in the current quarter, to decrease its projection for annualized real GDP growth in the third quarter from 6.0% as of mid-August to 3.7% as if early September.

While risks to the current expansion have clearly increased, we expect the economy to continue to exhibit underlying strength as many indicators remain healthy. We remain optimistic that, corporate earnings driven by increasing vaccination rates and job growth and the consumer powered by high savings rates and increased wages will together contribute to sustaining the market expansion into next year. As long as vaccines remain effective in minimizing hospitalizations and deaths, we expect the adverse impact from the recent surge in Delta variant infections to be isolated within certain sub-industries, such as the travel industry and movie theatres. If anything, a moderation of the economic growth trajectory will help keep potential upward pressure on interest rates subdued and more digestible.

Market observers will also be paying close attention to the upcoming third-quarter earnings season which kicks off in mid-October. The third quarter earnings season will be important to the cadence of the current expansion. The two primary questions market observers will be seeking clarity are:

  • To what extent have corporate earnings slowed (i.e., from a rate-of-change perspective rather than peak absolute growth)
  • What are corporate executive’s outlook for the last quarter of the year as well as 2022

We’re also paying close attention to the Federal Reserve’s announcement to commence winding down (i.e., tapering) its emergency asset purchases in the coming months. We believe this to be the first step away from full accommodation whereby the Fed will commence transitioning the economy from one supported by monetary and fiscal policies to one supported by fundamentals. During this transition, we expect investors to temporarily overreact to negative readings or changes in sentiment that will cause potentially significant market volatility. In such cases, we will evaluate the situation on its merit and act in accordance with our client’s specific objectives in mind.

The investing landscape continues to be both complex and challenging. We are monitoring markets closely and continue to believe this is the time to exhibit discipline. Therefore, we’re maintaining a balanced approach to asset allocation, remaining diversified and periodically rebalancing.

We will continue to keep you apprised of our thoughts and welcome your feedback. Please do not hesitate to contact us if you have any questions or comments about about anything we have written or otherwise.

*Opinion piece, please see Important Disclosure