It had to happen eventually: following seven months of positive returns, stocks sold off in September, just the year’s second down month, with the S&P 500 falling -4.8%.  

Round up the usual suspects: concerns over the spread of the Delta variant, inflation, weaker than expected employment gains… Add to that the failure on the part of Congress to either pass an infrastructure bill or raise the debt ceiling and concerns around China (augmented by the Evergrande news) and there were more than enough reasons for investors to take a pause.

China was a particular wild card. Concerns over China’s domestic property market have been percolating there for years without much impact. Enter Evergrande, the country’s second-largest property developer, and its $300 billion in liabilities, equal to about 2% of China’s GDP. The company is now in the grace period for an $83.5 million interest payment and others are considered to be at risk. Concerns over prospects for the company led to a one-day selloff of -1.7% in the S&P 500 on September 20th and hung over the market for much of the month.

 

Tapering

Coming out of the latest meeting of the Federal Reserve Open Market Committee, Chairman Powell again confirmed the Fed’s plans to start cutting back on bond purchases later this year.

While many analysts have been marking down their 3Q GDP estimates, the inflation data was nonetheless supportive of the Fed’s position. The month’s read saw price levels still elevated. The Consumer Price Index for August was up 0.3%, and 5.3% on a trailing 12-month basis. While significant, this was the smallest gain in seven months and below expectations for a 0.4% rise. The Producer Price Index rose 8.3% while the Personal Consumption Expenditures (PCEP) index was up 4.3%, the biggest annual increase since 1991. With every week that passes, the definition of “transitory” starts to seem more and more stretched.

Bonds had a tough month and unfavorable press. Bloomberg wrote “Bond Investors Brace for Worst Year in a Decades on Hawkish Fed” as September came to a close (Source: Bloomberg.com; 10/1/21). Similarly, in The Wall Street Journal the headline was “In Bond Market Rout, Investors See Overdue Correction” (Source: WSJ.com; 9/30/21). Rates did indeed move up, with the yield on the 10-year Treasury yield rising from about 1.3% to start September to just under 1.5% at month’s end.

Not to be outdone, Washington added its own drama to the month as debate continued on the size and scope of proposed infrastructure spending. Fortunately, both parties were able to come to an agreement on a continuing resolution to keep the government funded and open until December.  We’ll see what happens then.  Perhaps even more significantly, the deadline for raising the federal debt ceiling comes in October and, as of this writing, the two sides remain apart on how (or whether) to make this happen.

September brought a bit of good news on the Covid front as the spread seemed to slow and some models showed cases declining heading into the winter. The Biden Administration sought to mandate vaccinations for most federal workers, while Merck announced that its experimental anti-viral pill had been shown to reduce the risk of hospitalization or death among Covid patients by about half.

Finally, what’s a month without Bitcoin? The digital currency had been on a run since July on news that El Salvador planned to adopt it as legal tender. Then came an intraday “flash crash” on September 7th, knocking 17% off its value in a few minutes. Prices rallied from there, but Bitcoin went on to lose ground for the month overall, closing at just under $44,000. More recently, it’s been knocking on the door of $50,000 again.

Once again, September lived up to its reputation as a volatile month and set the stage for what could be a bumpy Q4.

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The S&P 500® Index is widely regarded as the standard index for measuring large-cap U.S. stock market performance.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The Producer Price Index (PPI) is a family of indexes that measures the average change over time in selling prices received by domestic producers of goods and services. PPIs measure price change from the perspective of the seller.

Personal Consumption Expenditures Price Index (PCEP) is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.

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