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Commentary provided by Mark Szycher, Vice President, Investment Specialist, AIG Retirement Services

Market Performance Snapshot* (Week ending October 1, 2021/September 2021/ Q3 2021/Year-to-Date)

  • Dow Jones Industrial Average®:  -1.4% | -4.3% | -1.9% | +12.2%
  • S&P 500® Index:  -2.2% | -4.8% | +0.2%| +16.0%
  • NASDAQ Composite® Index:   -3.2% | -5.3% | -0.4% | +13.0%
  • Russell 2000® Index:  -0.3% | -3.1% | -4.6% | +13.5%
  • 10-year U.S. Treasury note yield on September 30, 2021: 1.49%
    - Up 2 basis points from 1.47% on June 30, 2021
    - Up 57 basis points from 0.92% on December 31, 2020
  • Best-performing S&P 500 sector this week: Energy, +5.8%
  • Weakest-performing S&P 500 sector this week: Health Care, -3.6%
  • Best-performing S&P 500 sectors this quarter:
    - Financials, +2.8%
    - Communication Services, +1.2%
    - Information Technology, +1.0%
  • Weakest-performing S&P 500 sectors this quarter:
    - Industrials, -3.8%
    - Materials, -3.7%
    - Energy, -1.6%

    *Past performance is not a guarantee of future results.

Equities fall in September, largely erasing quarterly gains

Major indices closed out a choppy September during which they lost ground. The S&P 500 snapped a seven-month winning streak, however managed to hold onto a modest gain for the third quarter. Other major indices posted quarterly losses. Treasury yields continued to rise, with the 10-year yield closing the month and quarter at 1.49%, a gain of nearly 20 basis points in September.

  • Stocks recovered some ground on Friday, the first trading day of October, helped by news of a promising Covid treatment from Merck and positive data on U.S. consumer spending, consumer confidence, and manufacturing activity.
  • Consumer spending rose 0.8% in August after a 0.1% decline in July, according to the U.S. Commerce Department.
  • The University of Michigan’s consumer sentiment index rose to 72.8 in September, higher than August’s 70.8 and above the 71.0 forecast.
  • ISM’s manufacturing index was 61.1 for September, above expectations of 59.5 and well above the 50 level that separates expansion from contraction.
  • Durable goods orders rose 1.8% in August, above the median forecast of 0.6%. July’s orders jumped 0.5%, an upward revision from an initially reported 0.1% decline.
  • GM reported its 3rd quarter U.S. sales fell by nearly 33% from the prior year, though other auto companies gained. Consulting firm AlixPartners projects the semiconductor shortage will shave $210 billion off global auto industry revenue in 2021 – nearly double the figure projected in May.
  • New unemployment claims rose for the third straight week, to 362,000, 11,000 more than the prior week’s revised figure. Temporary factors related to administrative issues and lingering effects of Hurricane Ida may have played a role.
  • The National Federation of Independent Business reported that 50% of small businesses express difficulty finding workers, the latest evidence that mismatches in skills needed by employers and those offered by prospective workers could be challenging growth.
  • 2nd quarter U.S. GDP grew 6.7% after a 0.1% upward revision, topping the 6.3% registered in the first quarter. It is noteworthy that the second quarter ended as the Delta variant began taking hold in the U.S. The first reading on Q3 GDP will be released October 28.
  • Congress averted a federal government shutdown by extending funding through December 3. The legislation had to be de-coupled from a provision suspending the debt ceiling to gain Republican support.
  • The debt ceiling question is looming larger, with Treasury Secretary Janet Yellen telling Congress the government could run out of cash as soon as Oct. 18. The partisan squabble over the debt ceiling is more an issue of how to raise or suspend the limit rather than whether to do so, but continued bickering could generate additional instability in markets.

Strong corporate earnings help power equities through most of Q3

Amid a backdrop of labor shortages, supply chain disruptions, and rising input costs, corporate profits registered double digit annual gains, helping to fuel solid performance of equities through Labor Day. 

  • The S&P financials sector was the quarter’s top performer, gaining 2.8%, helped by strong earnings and rising interest rates. Information technology started the quarter well but had a tough September as rising yields took a toll on growth stocks.
  • Although the energy sector lagged throughout much of the quarter, the strongest gains were registered in September – up 9.3% – motivated by supply challenges and rising demand forecasts. Energy was the only sector to deliver a gain in September.
  • All S&P sectors are still positive year-to-date, with energy and financials leading the way.
  • Large cap stocks outperformed small caps in the quarter. The large cap Russell 1000 Index was flat while the small cap Russell 2000 Index declined 4.6%.
  • In international markets, the pan-European Stoxx 600 was flat for the quarter, but is up 14% year-to-date. The Shanghai Index declined 0.6% in the quarter and is up just 2.7% year-to-date, reflecting concerns about the China growth story. Japan’s Nikkei Index rose 4.9% for September, pulling the index to a 2.3% quarterly gain.

Fed tries to navigate a treacherous economic landscape

At a Wednesday forum hosted by the European Central Bank, Fed Chair Jerome Powell said it’s “frustrating to see the bottlenecks and supply chain problems not getting better – in fact at the margins apparently getting a little bit worse. We see that continuing into next year probably, and holding up inflation longer than we had thought.”

  • The Fed’s preferred inflation gauge, the core Personal Consumption Expenditures (PCE) price index, rose by an annual rate of 3.6% in August, the same as in June and July.
  • Sustained higher prices have historically led to interest rate hikes, but with the economic recovery still fragile –and perhaps more so than expected heading into the third quarter – the Fed continues to indicate rate hikes are at least a year away.
  • Markets recently started signaling their expectation of higher rates. The 10-year Treasury yield started the third quarter at 1.47% before falling below 1.20% in August amid economic growth concerns and the Fed’s commitment to keep rates lower for longer. However, the 10-year rate spiked to 1.54% in the final week of September as inflation concerns grew and mid-range economic growth concerns abated. Anticipation of a November announcement about tapering asset purchases helped fuel the rise in yields.
  • Two regional Fed bank presidents – Eric Rosengren (Boston) and Robert Kaplan (Dallas) – announced early retirements in the wake of revelations about personal trading. The two presidents are considered hawkish. Neither is a voting member of the FOMC now, but Rosengren was scheduled to become one in 2022 and Kaplan in 2023. Their replacements could influence policy as the Fed manages expected monetary tightening in coming years.
  • Jerome Powell’s term as chairman ends in February 2022 and President Biden will have to decide soon whether to nominate him for another four-year term. The question has divided Democrats, with Senator Elizabeth Warren calling Powell “a dangerous man to head up the Fed” and announcing that she will oppose his re-nomination. Other Democrats are vocally supporting Powell. Biden’s decision will be widely watched by market participants.

Investors question China’s regulatory moves while Europe faces an energy crunch

Throughout the third quarter, Chinese regulators worked to tighten control of activity in sectors including education services, technology, ride sharing, and cryptocurrency. The moves created turbulence in global markets as investors assessed how much risk government intervention posed to various sectors and companies.

  • The potential failure of real estate giant China Evergrande Group also sent ripples through markets in September, though fears of widespread knock-on effects appear to have abated for now.
  • The Chinese market turmoil came against a backdrop of slowing growth in the country as virus outbreaks caused intermittent closures, global supply chains suffered ongoing disruptions, and input costs rose, challenging Chinese manufacturers. On Thursday, China’s National Bureau of Statistics reported the country’s manufacturing sector contracted in September for the first time since February 2020.
  • Europe’s economy shifted into higher gear early in the third quarter before growing at a more moderate pace near the end of the quarter. Virus surges have been better contained than earlier in the pandemic as vaccination rates have risen.
  • The UK and Eurozone nations head into winter facing sharply higher energy costs. Less wind has left countries, particularly the UK, more dependent on traditional sources of energy, contributing to surging demand for natural gas and higher prices around the globe.
  • German voters dealt a blow to outgoing Chancellor Angela Merkel’s right-of-center party, setting the stage for a moderately left-of-center government. Markets reacted favorably, as the governing coalition yet to be formed is not expected to enact major tax increases or labor and regulatory changes favored by more leftist parties.

Final thoughts for investors

The third quarter saw the Delta variant cast a long shadow over the global economic recovery. At a panel held by the ECB this past Wednesday Fed Chair Powell said getting the virus under control “remains the most important economic policy.” While the economy has become more adept at adapting to the virus, winter could bring more surges, while high inflation, supply chain challenges, and labor market shortages look likely to continue. You don’t have to face a challenging market alone. Speak with a financial professional about staying on track toward your long-term goals.

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