September 2021 Insights

Key Observations:

Equities experienced their first monthly losses since January with broad, deep declines.
New supply chain challenges come front and center as a major headwind.
Market pullbacks of 5% and greater are more common than you think.

A September to Forget

September has historically been the worst month of the year for equities, and it certainly lived up that reputation this year. Stocks finally sold off after seven consecutive months of positive returns. The Dow Jones, S&P 500, and NASDAQ 100 indices declined 4.2%, 4.7%, and 5.7%, respectively. The selloff was broad with few bright spots. According to Morningstar, 10 of the 11 economic sectors declined for the month. The lone bright spot was energy, up 9.8%. From large growth to small value, every asset class declined in September. How about foreign stocks? After trailing the performance of U.S. stock for eight straight months, developed market equities outperformed U.S. stocks by 1.75% as they declined “only” 2.9% in September. Emerging market stocks were less impressive, losing approximately 4.0%.

Losses were not isolated to the stock market. Bonds fared better but were still down as the Bloomberg US Aggregate Bond Index lost 0.9% in September. On the heels of a modest increase in longer-term yields, long-term Treasury bonds declined 2.9% while short-term bonds were flat. Oddly enough, junk bonds eked out a 0.02% return in what otherwise was a risk off-market. Lastly, precious metals failed to shine as gold dropped 4.0% and silver an incredible 10.5%.

Cause and Effect

What led U.S. stocks to experience their worst month since March of 2020? Most likely, it’s a confluence of several factors. Supply chain issues have come front and center once again. According to Business Insider, Southern California ports are experiencing their greatest ship-backlog on record. (1) As of the end of September, more than 65 enormous container boats were anchored off the Southern California coast while 95 massive cargo ships and another 147 vessels were in port, all records. The consequences include the average wait time for these vessels to unload has increased 40% from 6.2 to 8.7 days, the average time for an ocean freight to go door-to-door has increased 43% (50 days to 72 days), and the costs of shipping containers have risen by some estimates as much as 500%. Why does this matter? Stocks have performed consistently well this year with muted downside volatility because corporate earnings have smashed all expectations. These Southern California ports facilitate nearly 50% of all U.S. imports. Delays in delivering products to market and associated rising costs (and at the worst possible time as inventories need to ramp up for the Christmas season) have tamped down expectations earnings surprises will continue.

There’s more. Inflation pressures are not limited to supply chain issues. Labor remains in high demand and tight supply. We are all feeling the pain at the pump as oil has hit a seven-year high. (2) Inflation expectations are running hot even if bond yields are stubbornly range-bound. As many investors expect a significant increase in bond yields on the horizon, the appetite for high P/E technology stocks has disappeared.

Lastly, there is an even heightened risk to the seemingly endless stimulus from monetary and fiscal policy. Following September’s Federal Open Market Committee meeting, Fed Chairman Powell stated, “While no decisions were made, participants generally viewed that so long as the recovery remains on track, a gradual tapering process that concludes around the middle of next year is likely to be appropriate,” (3) Translation, the Fed is going pump the brakes on bond-buying to slow the growth in money supply.

As for fiscal policy, we have all witnessed the calamity in Washington as a once certain infrastructure bill, and its long-term economic impact is in peril. As these additional uncertainties were piled onto a near perfectly priced market, investors took profits and demanded greater expected returns from equities which required a decline in stock prices.

Final Thoughts – A Silver Lining

Yes, there are multiple reasons stocks slid sharply in September. However, it is worth noting profit-taking and the two most impactful headwinds, supply chain backlogs and inflation, are the result of a robust economic recovery led by strong aggregate demand. Recession is not in the cards, so a sustained bear market is highly unlikely. These 5% to 10% selloffs are however common in sustained bull markets. In fact, during the past ten years, the S&P 500 has experienced 18 selloffs of 5% or more during an eight-week period. (4) Taking profits and repricing risks are a normal part of a healthy stock market.

At CAM, we are constantly watching and assessing market conditions. If our long-term outlook changes, we will prudently adjust client portfolios to address our view of these opportunities and risks. Therefore, months like September are a good reminder to review your portfolio with your Advisor to ensure you have a well-diversified portfolio of stocks and bonds that will serve your financial planning needs.

Author

Mitch York

CIO

Concord Asset Management

Sources:

All performance data is generated through Morningstar.

You cannot invest directly in an index. A description of each comparative benchmark/index is available upon request.

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