The Fed Provided Incremental Guidance on Tapering and Rate Policy
In its clearest signal yet, the Federal Open Market Committee (FOMC) foreshadowed a near-term tapering of monthly bond purchases. The consensus prediction is that the Fed will announce a start to the process as soon as their November meeting. Another change in Fed communications alluded to when the tapering may end (mid-year next year), allowing market participants to anticipate what a symmetrical monthly taper could look like. While there is consensus that short-term rates will eventually be moving higher, there is now a bit more dispersion of opinion on timing from later next year to into 2023 as previously guided.
|Market Index Returns||September 2021||YTD 2021|
|S&P 500 Index||-4.7%||15.9%|
|Russell 2000 Index||-2.9%||12.4%|
|MSCI EAFE Index||-2.9%||8.3%|
|Barclays US Agg. Bond Index||-0.9%||-1.6%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.0%|
Stock Market Review & Outlook
U.S. Equities Broke the Streak of Consecutive Monthly Gains
The S&P 500 was lower by -4.7% in the month. The technology-focused NASDAQ Composite was off by -5.3%. Supply chain issues, shipping and labor costs weighed on a number of industries, particularly retailers. Container ships have become the must have item to mitigate light inventory levels in advance of the holiday shopping season. Cyclical sectors like Materials and Industrials pulled back, perhaps due to concerns of the COVID-19 Delta variant leading to an economic slowdown, but equally plausible is that they were merely part of broad-based profit taking by investors. Growth sectors like parts of Communication Services and Information Technology provided no solace either. Mega-cap tech FAANG stocks (Facebook, Amazon, Apple, Netflix, Google) lost north of $480 billion in market cap during the month. Energy was the lone positive during the period as oil and commodity prices rose in lockstep with interest rates and near-term inflation. Stocks outside the U.S. declined as well, providing minimal diversification benefit during the month.
The yield on the bellwether 10-Year U.S. Treasury rose during the month, at one point to 1.56% before settling back down to 1.49%, 18 basis points higher than the start of the month. In a normal environment, with textbook bond market dynamics at play, investors may have seen this as a sign of green shoots of economic growth on the horizon. Perhaps there would be some worry about higher borrowing costs hitting the bottom lines of companies, but positive none-the-less for a more favorable business environment. This jump in yields however has more to do with the Fed’s clear signal on near-term bond purchase tapering. The 800-pound gorilla artificially bidding up bond prices (and lowering yields) for the past 18 months may be gearing up to slow their purchases, but we are keeping in mind that a tapering is not a tightening of monetary policy, it is merely a slowing of ongoing easy monetary policy, in which the Fed will continue to add to their over $8 Trillion bloated balance sheet for many months to come.
|S&P 500 Sector Returns||September 2021||YTD 2021|
Economic Review & Outlook
Are Consumers Getting Spooked with Halloween Still Weeks Away or Just Cautious?
Consumer Sentiment as measured by the Conference Board declined for a third straight month. Concerns about the Delta variant and a rise in food and energy prices are likely weighing on the readings. Survey details seem to indicate that consumers are most concerned with future business conditions, although views on jobs and future income were modestly lower as well. With the critical holiday shopping season around the corner, retailers will be looking to engage their consumer base to open their wallets anyway possible.
Although headline unemployment has declined to a more palatable 5.2%, Initial Jobless Claims rose in the final three reports of the month, following the expiry of additional pandemic-related benefits. The four-week moving average on initial claims was higher by 4,250 to 340K. That is the first increase in this measure in six weeks and contrary to expectations once additional stimulus ended. Subsequent reports, particularly of the closely followed monthly Nonfarm Payrolls will be useful in gauging how well the labor market can continue to recover and fit available workers into open jobs.
Chart of the Month
Median Fed Projections
for Rate Increases Surpassed
As shown in the chart above the FOMC latest report of short-term rate expectations (red line) breaks higher than implied market rates (green line) after next year. Market participants need to keep in mind that the median of disparate opinions rarely matches the reality of Fed action.
Funding of the U.S. Government was extended to December 3rd, allowing ongoing wrangling with massive spending bills in Washington to continue. The COVID-19 Delta variant remains a key risk to economic growth if not properly contained to avoid a reversal on eased restrictions. We also need to keep an eye on how long supply chain bottlenecks and other pricing pressures persist to determine how long the word “transitory” can stretch.
Should a rise in interest rates continue, that may prove to be a headwind to growth stocks in the coming months. As always, we will continue to look for unwarranted dislocations in stock prices relative to our assessment of intrinsic value to capitalize on opportunities on behalf of you, our clients.
Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.