T.S. Eliot: “April is the cruelest month.”
September: “Hold my beer.”
Q3 2021 Market Highlights
Most major indices were negative or only slightly positive
- S&P 500 +0.58%
- Russell 2000 -4.36%
- MSCI EAFE $US -0.45%
- MSCI Emerging Markets $US -8.09%
- Bloomberg US Aggregate Bond +0.05%
- Bloomberg High Yield Corporate +0.89%
- Bloomberg Commodities +6.59%
- Dow Jones US Select Real Estate +1.25%
S&P 1500 and other Trends
- The bull market which began in late March 2020 continued through July and August, but then it did a strong reversal in September, leaving the S&P 500 (large domestic companies) as the only major stock index to show a gain for the quarter. The “September Effect” is a well-documented (although possibly random) phenomenon. In fact, since 1983, September is the only month to have an average negative return for the S&P 500 Index (-0.41%; the overall average monthly return is +1.02%).
- The issues that dominated the market included the Delta variant of the COVID-19 virus, the rapid expansion and possible default on U.S. government debt, and the potential default on $300 billion in debt by Chinese real estate company Evergrande Group.
- But the biggest factor hindering the U.S. economy right now is supply chain disruptions that are preventing supply from meeting accelerating consumer demand as the country tries to get back to pre-pandemic levels of economic activity. This topic is worthy of a full dissertation by itself, but the highlights include a shortage of shipping containers, long-haul truck drivers, railroad freight workers, and high-tech computer chips (mainly to serve the automotive industry).
- Continuing another established short-term trend, the only style boxes to meaningfully outperform were Large Growth (+2.50%) and Mid-Cap Growth (+1.94%), which represented 40% of the universe at the beginning of the quarter. The other seven style boxes all had negative returns.
- Stocks tied to consumer spending did poorly, highlighted (lowlighted?) by PayPal (-10.73%), Amazon (-4.51%), Visa (-4.60%), and MasterCard (-4.65%).
- Oil prices were fairly stable for the quarter but still $13 to $15 above their 12-month averages. This added to the misery of companies that provide transportation, especially those that ship merchandise. Significant underperformers here included FedEx (-26.24%), United Parcel Service (-11.95%), Union Pacific (-10.39%), Norfolk Southern (-9.45%), United Airlines (-9.03%), and JetBlue Airways (-8.88%).
- Treasury yields showed only very small increases from June 30 to September 30, but there was a significant dip and recovery along the way, with long rates bottoming out on August 4. The 30-year yield went from 2.06% down to 1.83% and then back up to 2.08%. Rising interest rates tend to be especially bad for high dividend stocks and smaller companies that rely heavily on debt financing. Under the right circumstances they can be beneficial to companies with large cash resources, including banks, insurance companies, and securities brokerage firms. That was certainly the case in the third quarter.
- Healthcare stocks as a group did well, but this was largely driven by the success of Moderna (+63.78%), the manufacturer of one of the three COVID-19 vaccines approved for use in the U.S. Other success stories were found in innovators in devices, diagnostics, and research such as Thermo Fisher Scientific (+13.31%), Danaher (+13.52%), and DexCom (+28.07%). Pharmaceuticals continued to sell off, especially those who do not manufacture COVID vaccines. Major companies included Amgen (-12.04%) and Bristol Myers Squibb (-9.98%).
- Success in the market was narrow, with only 593 stocks outperforming the S&P 1500 index. The largest 50 stocks at the beginning of the quarter (representing roughly one-half of the total dollars invested in the U.S. stock market) had a weighted average gain of +1.72%, compared to a return of -1.05% for the other 1450 stocks. Narrow market leadership is a bearish sign for the stock market.
The dollar’s performance vs. other major currencies was almost universally strong, with the biggest gains coming against the Brazilian Real (+8.58%), South Korean Won (+5.10%, despite South Korea’s desire to peg their currency to the dollar), and Australian Dollar (+4.29%). A strong or rising dollar is bad for U.S. investors holding stocks that are traded on foreign exchanges, since those investors ultimately have to convert their investments back to U.S. dollars which have risen in price.
For a deeper dive into some of the market details from the previous quarter, click here.
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. Any economic forecasts set forth may not develop as predicted and are subject to change. References to markets, asset classes, and sectors are generally regarding the corresponding market index. 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.
The prices of small and mid-cap stocks are generally more volatile than large cap stocks.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.
The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.
Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
The Bloomberg Barclays U.S Corporate High-Yield Bond Index is an unmanaged market value weighted index composed of fixed-rate, publicly issued, non-investment grade debt.
The Bloomberg Commodity Index is a broadly diversified commodity price index made up of exchange-traded futures on physical commodities which are weighted to account for economic significance and market liquidity.
The Dow Jones US Select Real Estate Index is designed to measure the performance of real estate securities publicly traded in the U.S.
The MSCI EAFE Index is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.
The MSCI EM (Emerging Markets) Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of the emerging market countries of the Americas, Europe, the Middle East, Africa and Asia.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell 3000 index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
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.
The S&P 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.