Global equities fell in September for their first monthly decline since January on concerns that Chinese property developer Evergrande’s debt woes could spell trouble for the global economic recovery. The S&P 500, a benchmark for large cap US stocks, declined -5% on the month for a +16% return through the end of the third quarter.
Smaller company stocks, which tend to be more domestically focused and are thus more insulated from international volatility, lost -3% in September, with the Russell 2000 up +12% in 2021. Overseas equities declined -3% on the month for a 6% full-year return per the MSCI ACWI ex-US Index. Fixed income markets also continued their fall, with interest rates marching higher on expectations that the Fed could begin to hike interest rates as soon as next year. The Barclays US Aggregate Bond Index declined -1% in September for a -1.5% return year-to-date, with the 10-year Treasury yield topping 1.5% for the first time since June. Gold prices fell -3% this month for a -8% return so far this year.
We saw no changes in any of our proprietary “Three Dials” readings during the month of September, each of which are summarized below:
Despite the September wobble, equities remain above support levels established over the course of this year and are entering a period of seasonal strength. Q4 has been the S&P’s best performing quarter of the year dating back to 1950 and has produced a positive return roughly 80% of the time. As such, our Momentum Dial remains in a “Positive” position heading into the final quarter of the year.
So far, China’s central bank is taking the appropriate steps to contain the fallout from Evergrande’s difficulties, limiting the probability of a global financial contagion. In the US, the employment situation continues to improve, and manufacturing data remains strong. On balance, our Fundamental Dial remains in a “Positive” position based on the current pro-growth landscape.
Equity valuations remain under the threat of higher interest rates, which put pressure on future earnings and cause investors to be more wary of high-priced growth stocks. Since equities remain near historically high multiples, our Valuation Dial continues to show a “Negative” reading.
Our Three Dials composite reading takes a “Cautiously Optimistic” view into the fourth quarter, as strong showings in the areas of Momentum and Economic Fundamentals are balanced by Valuation concerns.
Sources:
https://www.washingtonpost.com/us-policy/2021/09/22/fed-powell-taper-rate-hike/
https://lplresearch.com/2020/10/01/october-and-the-fourth-quarter-in-six-charts/