October 11, 2021
Third Quarter 2021 Market Review and Outlook
All good things must come to an end. The cascading of bad news at the end of September was finally too much for what had been a historically resilient stock market. Global supply chain disruptions, soaring energy prices, COVID-19, stalled infrastructure bills, inflation worries, Chinese contagion fears, and a looming Fed taper finally weighed on the market, resulting in the end of two remarkable streaks.
First, the S&P 500 fell 4.8% in September, stopping the number of consecutive monthly gains at seven. That was tied for the 20th longest stretch since 1925 and was the longest since the 10 months ending in January 2018. Second, the S&P 500 closed 5.1% below its September 2nd record high, ending the streak without a 5% pullback at 211 trading days, or since October 30, 2020. It was the 13th longest on record and the longest since January 2018. For perspective, the average rally lasts 72 trading days before such a pullback.
If there is a message in all of this, it’s don’t cry because it’s over, smile because it happened. Of the 12 longer streaks, 11 occurred during ongoing secular bull markets. The exception was the 219-day streak that ended on 2/11/2004, and that decline was only 8.2%. History provides a nugget for the bears, too. Of the previous 11 cases, five turned into 10% corrections, slightly higher than the 31% chance for all 5% pullbacks.
The question from here is whether the correction is complete, and we set up for a year-end rally, or if there is yet another series of rotations that hit the indices harder and lead to a larger and longer correction.
There seems to be no shortage of risks to worry about and investors are already bracing for the continuation of negative catalysts by expecting higher volatility and hedging for a further correction. Ongoing supply chain disruptions in energy, transportation, and semiconductors keep inflation elevated, boosting inflation expectations. Investors have reacted by selling bonds, thus pushing interest rates up. After a year of positive economic surprises, data has also started to come in on the softer side, resulting in lower guidance and an adjustment in stock prices. Slower economic growth, continued increases in input costs, rising wages, and higher tax rates all weigh on profit margins. The federal debt limit is another issue Congress needs to address relatively soon. If they can’t agree, another partial shutdown is possible, further disturbing risk assets.
On the positive side, there are several possible positive catalysts for investors to consider. The first being a continued downtrend in global COVID-19 cases and a peak in U.S. cases. This helps economies reopen and supply chains recover. Also, after much internal wrangling, Democrats seem likely to agree to a sizable infrastructure package supporting productivity growth and economic growth for years to come. A final positive catalyst is China restructures and backstops Evergrande and eases monetary policy, thereby reducing the risk of contagion in the economy.
Regardless of which direction the market unfolds, we will (as always) continue to monitor the economic and investment landscape and make changes accordingly.