Not So Fast
The “great re-opening” began to stall during the third quarter, ushering in a wave of volatility in the stock market. July and August were rather calm, rising steadily before peaking on September 2nd. A slow decline followed the next few weeks, accentuated a sharp increase in volatility during the last two weeks the quarter; driven by rising rates, inflation fears, and chaos in the Chinese property market. The S&P 500 ultimately ended the month of September down nearly 5% but managed to remain slightly positive for the last three months overall. The DOW and NASDAQ did not fare quite as well, both dipping into negative territory for the quarter, however all major market stock indexes remain positive for the year.
It should be unsurprising that September was negative, as it has historically been the worst month for US stocks. In fact, when looking at average US stock returns by calendar month going back to 1926, September alone has a negative average. Those declines and subsequent rebounds likely contributed to November – January being the three-month period that has historically experienced the largest gains.
International markets moved nearly in lockstep with their US counterparts, though with slightly more muted growth during the summer leading to a slight loss for the quarter. Recent headline news from the UK surrounding gas and drug shortages added to the instability.
Interest rates jumped early in the year and steadily worked their way back down until early August. We’ve seen a gradual increase since, which has put pressure on bond prices. For now, rates remain below the levels reached back in April and credit spreads remain narrow, a sign that the market sees a low probability of companies defaulting any time soon. The aggregate bond index finished the third quarter essentially flat and remains slightly negative for the year.
A US government shutdown was averted in the final hours of September, but congress failed to address the nearing debt ceiling. While the debt ceiling debate often elicits calls to cut back on government spending, lifting the limit does not actually authorize any new spending – it simply allows the US to finance existing obligations. Congress has acted to adjust the ceiling 78 times since 1960 and we anticipate they will again – though likely not until around the time that the Treasury exhausts its borrowing capacity, which could be in late October or early November. While politicians like to grandstand, it’s widely recognized that the ramifications of not lifting the limit and allowing the US to default could be an economic catastrophe.
Geopolitical risks aside, there’s reason to be optimistic about the economy as year-end approaches. The Conference Board Leading Economic Index has continued to rise and we’re likely to see stronger job gains this Fall. Vaccination rates are edging up, enhanced unemployment benefits expiring, and schools are reopening in-person, making more parents available to reenter the workforce. Global supply chains are still in recovery but should see continued improvement as time moves along.
As always, please let us know of any questions or concerns. We are available to visit in-person, via Zoom, or on the phone.
The PWM Team
