2021 Third Quarter Market Commentary

2021 Third Quarter Market Commentary

October 04, 2021
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Stock investing spawns a curious behavior – people get enthusiastic when they have to pay more for the product and get skittish when the opportunity arises for them to purchase shares at a reduced price. 

 

After an impressive run that saw the S&P 500 index (a group of 500 mostly American large companies that is used as a proxy for the entire stock market) gain 40% in ten months, the stock market took a breather in September, with share values collectively dropping by 4.65%.  Oh sure, we could place the blame on the Delta variation of COVID-19, or a massive $3.5 trillion infrastructure bill proposed in Washington that may or may not become reality, or ongoing supply chain disruptions for many consumer products, or the potential default of Chinese real estate company Evergrande, or inflation numbers that haven’t been that high since a brief blip in 2008, but the best explanation of all for why the market fell in September is … this is what the stock market does.

 

The -4.65% return for the S&P 500 in September 2021 was only the 42nd-worst month for the index since 1983.  And do you know what happened after each of the 41 that were worse?  The index came back to later hit an all-time high.  That’s another thing that the market does.  In fact, since 1970 there have been 211 month-end closings that represented all-time highs.  And every one of them was accompanied by an excuse why this was NOT a good time to buy stocks.

 

In some ways the third quarter of 2021 was a continuation of trends that have been in place for the first half of the year or longer.  Specifically, market leadership was narrow, with only 593 of the stocks in the S&P 1500 index outperforming the size-weighted index average, and those stocks were predominantly classified as “growth” stocks, meaning that they are reinvesting their earnings into product development rather than paying significant cash dividends to their shareholders.  Stocks like this tend to be more speculative investments, but they also tend to get priced on their own merits and less susceptible to macroeconomic factors such as commodity prices, interest rates, and currency strength.

 

Interest rates and oil prices are two factors which were reasonably stable for the quarter, although interest rates fell in July and then came back in August and September to where they were in June.  Oil prices didn’t move all that much in the quarter but remain about $13-$15 dollars (per barrel) above their 12-month averages.  If prices remain above $73, this would be a favorable scenario for emerging markets exporter countries such as Russia, Mexico, and Brazil.  And the COVID reopening of Europe seems to be lagging the recovery here in the U.S., so there is still an opportunity to invest in those markets ahead of the recovery.

 

The dollar gained in value relative to nearly every other major world currency in the quarter, but it would be reasonable to expect a reversal of that trend, especially in light of the accelerating growth in the debt owed by the Federal government.  A strengthening dollar favors domestic investments, and a weakening dollar favors foreign investments.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.

The S&P 1500 Index is a stock market index of all stocks in the S&P 500, S&P 400, and S&P 600.