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.