Market Update September 27, 2021
Economic data for the week included no action by the Federal Reserve regarding interest rates (although they gave strong signals about upcoming tapering). Otherwise, existing home sales fell, new home sales and housing starts rose, while jobless claims were mixed.
U.S. equity markets rebounded from a volatile start to the week to gains, while foreign equities ended mixed. Bonds lost ground across the board as investors interpreted a somewhat optimistic Fed into higher interest rates. Commodities rose across the board, led by a sharp supply-driven rise in the price of crude oil.
U.S. stocks started the week poorly, down over -2.5% upon news of Chinese debt contagion (property developer Evergrande) and the upcoming fight over the U.S. debt ceiling. However, the vote by the House for temporary suspension of the ceiling until year-end 2022, and agreement to fund the government until early Dec. appeared to help matters, although Senate approval remains the wildcard. Generally, easing worries over the Evergrande response in China, and a Fed that remained confident about the economy appeared to boost spirits through the remainder of the week.
By sector, energy was the outperformer, up 4%, followed by moderate gains in financials, technology, and industrials. The defensive sectors of health care, consumer staples, and utilities lagged, with negative returns for the week. Real estate also fell over a percent, in keeping with higher interest rates.
Foreign stocks were mixed, as strength in Europe and the U.K. was offset by a sharp decline in Japan and the emerging market group. Although returns were generally mixed by country in a tight band, the broader index was pulled down by China, with sentiment no doubt impacted negatively by the Evergrande incident. A restructuring plan and banking system injection seemed to calm conditions down, to some degree.
U.S. bonds suffered last week, with long-term treasury rates rising by over 10bp, as investors digested the Fed’s somewhat hawkish comments mid-week. Immediately following the Fed meeting on Wed., interest rates were little changed in response, and the treasury curve actually flattened slightly, before later higher rates. Another compounding effect was the central bank of Norway deciding to raise rates (from zero to 0.25%—the first developed nation to do so), as well as discussion about the matter at the Bank of England, resulting in an end to their QE. Corporate bonds declined a bit less, while floating rate bank loans experienced positive returns.
Foreign bonds generally fell to a greater degree, with the negative headwind of a stronger dollar—particularly in emerging markets, driven by negative China news. The Chinese real estate developer Evergrande’s potential default on more than $300 bil. rattled global markets. It’s a classic tale of too much leverage, although the risk has plagued the Chinese real estate development sector for quite a while. Other than in some EM high yield debt market indexes, exposure to that segment appears contained in many asset allocation portfolios.
Commodities saw gains broadly last week, despite the usual headwind of a stronger dollar. Energy and agriculture outperformed lesser increases in industrial metals and precious metals. In addition to further price increases for natural gas, the price of crude oil rose 3% to just below $74/barrel. This was due to tighter supply concerns from stronger demand (in fact the lowest oil stocks in three years), as well as still-reduced production from hurricane-affected Gulf of Mexico facilities.
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.