Q3 2021 Market Recap: Markets Are “Spooked” This Halloween!
Everything was really feeling like the time of “Summer Lovin’,” and then China began the disruption of U.S. and global markets. They are not totally responsible, but they certainly were the catalyst. Basically, in September, there were 4 or 5 events that occurred that set us on a “correction.” First, as mentioned, the China Evergrande, the biggest real estate developer in China, burns a lot of cash as they develop properties. During this month, Evergrande reached their limit. There were no more lenders of cash to be found, and the company’s outstanding debt repayment schedule was under attack. The global markets were very worried about the potential contagion into other world markets. Second, the Federal Reserve has been talking a good game about “transitory” inflation, and Powell’s comments were rather hawkish which signals a possible shift in what the Fed has been saying about inflation being transitory. The market hates the idea of prolonged inflation. The political fighting over the debt ceiling and infrastructure hasn’t helped either. Finally, the COVID delta variant began to subside but is hardly eradicated and energy prices have spiked. None of the aforementioned leaves the capital markets with warm and fuzzy feelings about the future. In fact, the recent up and down of the VIX reflects the schizophrenic uncertainty felt in the global equity markets. Boo!
The S&P 500 was down 4.7% for the month of September and put a little ding in most portfolios. October has gotten off to a fast-paced start with the market moving up or down 3-500 points many days in a row. During September, the 10-Year U.S. Treasury yield dropped as low as 1.28%. As of this writing, it is closer to 1.56%. Spreads on high yield bonds and investment grade bonds are still pretty tight, and this is good because it indicates that there is normalized liquidity in the bond markets. The slight uptick in yield is not a problem at this point, and we are glad to see that many analysts are calling for 42% of the S&P 500 to report increases in earnings. The coming months will test U.S. interest rate policy makers, and signal to us the real position on inflation.
Therefore, we cannot tell you it’s all smooth sailing ahead. We believe that the 4th quarter could be more of the same: choppy. We have significant cash positions in our client accounts should there be an opportunity that avails itself to us. That having been said, we are in somewhat of a holding pattern. We have very significant gains in most accounts and will use this quarter to handle any left-over tax issues. Since the White House has been silent, we don’t really know the exact timing of when the new capital gains taxes will be implemented, but we tend to think it might be retroactive to sometime this year.
This is not all bad news. Unemployment is still okay, and the market continues to try and find the silver lining. We wouldn’t be surprised with more volatility this month, but we are well positioned to take advantage of it. As we come into the 4th quarter, politics and earnings seem to be “the main thing.” Our focus is going to be sticking to our discipline and long-term strategy. This has held us in good stead for many years. Until we catch up again, Happy holidays to everyone!