Market Update September 13, 2021
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Economic Update 9-13-2021
On a holiday-shortened and light week for economic releases, data included improvement in job openings and jobless claims, as well as higher producer price inflation.
Global equity markets fell back throughout the course of the week, as continued Covid cases and rising prices have raised fears about the durability of the recent growth stretch. Bonds were little changed in the U.S., while foreign debt was negatively impacted by a stronger dollar. Commodities were mixed, with gains in industrial metals and energy offset by declines elsewhere.
U.S. stocks lost ground consistently last week—a pattern investors have not been used to as of late. Sentiment took a turn for the worse early, as rising Covid delta variant cases nationwide raised concerns over a dampening of economic growth and continuation of supply-fueled inflation. Several well-publicized downgrades of Q3 and Q4 potential GDP exacerbated those worries from a market standpoint. In addition, stronger producer prices fueled inflation concerns leading to speculation about an earlier Fed exit from bond buying—perhaps from December to November. Every sector was in the negative last week, with industrials and health care leading the way, each down -2% to -3%. Cyclical real estate also fared poorly, losing -4% for the week. Interestingly, consumer discretionary stocks fared far better than average last week, only down a fraction of a percent.
From the standpoint of U.S. fiscal policy, Sen. Joe Manchin, one of the centrist Democrats opposed to the largest and most progressive version of the infrastructure package, called for a ‘strategic pause’ on the budget reconciliation legislation. While this seems unlikely to derail an ultimate passage of the deal, the larger $3.5 tril. size might be in doubt, with estimates of half that figure looking increasingly likely. This appears to be a bit of a mixed bag for markets—which tend to think short-term. While the potential for needing to implement higher taxes (especially corporate) may fall with a smaller package size, the spending surge into the economy will fall as well. Somewhat related to this, a debt limit increase vote will be necessary in the next few weeks, with hopes that negotiations go smoother than they have in the past. The potential for a negative outcome in these discussions may also be weighing on risk assets under the surface.
Foreign stocks also declined for the most part last week, but to a lesser degree, despite the headwind of a stronger dollar. The European Central Bank, split between policy alternatives with still-high Covid case counts, decided to lower the pace of bond purchases starting in Q4. (They referred to it as ‘recalibrating’, emphatically noting it was unique from the dreaded ‘tapering’ label.) Bucking the trends elsewhere, Japanese stocks gained over a percent as Prime Minister Suga’s choice to not see reelection has caused sentiment to surge—based on expectations of more stimulus forthcoming. Emerging markets also fell to a lesser degree than U.S. stocks, although country-by-country results were mixed. Minimal further declines in China were offset by far larger declines in more cyclically-sensitive and inflation-hit Brazil, Turkey, South Korea, and South Africa. Commodity-sensitive exporters Russia and Mexico have also fared a bit better, buoyed by price strength in the materials segment.
U.S. bonds were flattish last week, despite the drop in stocks, which can often fuel a flight to safety. Treasury yields were little changed, while high yield and bank loan prices fell back somewhat—to be expected given their higher correlation to equities. Strength in the dollar last week had a negative effect on both foreign developed and emerging market debt, which ended in the negative for the week.
Commodities ended the week mixed, with strong returns in industrial metals of over 4%, as well as those for natural gas, were offset by declines in agriculture and precious metals. The price of crude oil rose by under a percent on net to just under $70/barrel, in a seesaw-type week with little volatility.
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.