October 07, 2021
Monthly Market Summary – September 2021
September was a choppy month for global financial markets with the exception of the energy sector. Equity markets started on a high note with certain indices continuing to set new record highs, but the tone quickly changed with most major country indices finishing the month with negative returns. Interestingly, the S&P 500 index recorded the first negative monthly return since January and the largest monthly decline since March 2020. Reports of high inflation in multiple countries, softening economic data across various regions, and worries about the potential contagion impact of a bond payment default by a giant Chinese real estate company were some of the factors pushing equity prices lower. Worries about inflation were fueled in part by the increase in natural gas and crude oil prices. Natural gas was up 32% for the month. West Texas Intermediate crude oil rose to $75 per barrel, a three-year high. Supply/demand imbalances due to hurricane Ida impacts and supply chain problems put upward pressure on energy prices. However, a primary reason for the market volatility in September was concern about when key central banks will change monetary policy. Some news came late in the month after the Federal Reserve Open Market Committee (FOMC) meeting. The FOMC indicated it may begin as early as November to reduce the amount of monthly bond purchases. In addition, the median of interest rate forecasts by committee members pointed to an interest rate hike before the end of 2022 which was a change from the prior forecast that showed no rate hikes until 2023. The news from the FOMC spooked bond market participants and pushed Treasury bond yields higher. Equity markets reacted negatively as yields rose. As a point of reference, the 10-year Treasury bond yield increased from 1.30% to as high as 1.54%. However, that is where the yield was late in June and is still below the highs for the year of 1.75% reached in March.
Key economic news in September was inflation data. In the U.S., the consumer price index (CPI) rose 5.3% over the prior year. This was the fourth consecutive month of a CPI report over 5%. In the United Kingdom CPI was up 3.2%, the highest increase in nine years. On the producer side of the economy, the U.S. producer price index (PPI) rose 8.3% on an annual basis, the fifth straight monthly increase and a record high. In China the PPI rose 9.5% in August over the prior year, which was a 13-year high. Shortages are leading to higher prices for commodities, transportation, wages, and inputs for production across industries which are being passed on to consumers. Despite reassurances from central banks that rising inflation is transitory as economies adjust from COVID pandemic impacts, some market participants are increasingly worried about more lasting inflationary impacts.
After reaching record high levels at the start of the month, major U.S. equity market index returns turned sharply lower and ended the month with negative returns. Smaller company stocks outperformed larger company stocks. As sector leadership shifted, value stocks outperformed growth stocks in the large, mid, and small-capitalization (cap) indices. After being the only sector with a negative return in August, the energy sector was the only one of the 11 industry sectors in each market cap category to post a positive return in September. Energy stocks were boosted by the surge in crude oil and natural gas prices due to a variety of supply issues. The financials sector was the second-best performer in each market cap category with only a small negative return boosted by rising Treasury bond yields. Other sector results varied by market cap. Materials was the weakest performing sector in the S&P 500. Industrials had the lowest return in the mid-cap index. The utilities sector was the weakest performer in the small-cap index.
The MSCI EAFE index of developed international equities ended the month with a negative return. However, the index return outperformed the U.S. equity indices and the MSCI Emerging Markets (EM) index. U.S. dollar-based returns for both the EAFE and EM were lower than the local currency returns since the U.S. dollar strengthened during September. Just as in the U.S. indices, value stocks outperformed growth stocks in the EAFE and EM indices. Also, similar to results in the U.S., the energy sector was by far the best performing of the 11 sectors and was the only sector to post a positive return in the EAFE index. In the EM index, the utilities sector also had a small positive return. On a geographical basis, among developed international markets, the Far East region outperformed the European and Pacific ex Japan regions due mainly to the gain in the Japan index. Japanese equities rallied on news of the resignation of the prime minister who was unpopular for his handling of the COVID pandemic. Among emerging markets, the Latin American region was down sharply led by the double-digit decline for the Brazil index. Brazilian equity prices were pressured by political issues and worse than expected inflation data. Russia was the top performing EM country helped by the oil price rally. India also had a small positive return.
U.S. bond market sector returns were negative for September as bond yields moved higher. Bonds traded in a tight range for most of the month. However, yields rose after the more hawkish comments by the FOMC after their September meeting. The 10-year Treasury bond yield rose from about 1.30% for most of the month to as high as 1.54% late in the month before retreating to 1.49% at month-end. In a rising rate environment, bonds with a shorter time to maturity declined less than longer-term bonds. High yield bonds outperformed investment grade corporate, government, mortgage-backed, and municipal bonds. Higher oil prices contributed to the better performance of the corporate high yield index since energy company bonds make up a large portion of that index.
The Bloomberg Commodity index generated a return of about 5% for the month due to the rally in energy prices. The energy sub-index had the highest return among the commodity indices we track with a gain of 17% as both crude oil and natural gas prices rose. The price for West Texas Intermediate crude oil rose 10% during September and hit a three-year high. Prices for industrial metals eased with that index declining about 2%. The precious metals sub-index had another sizeable decline as the price of silver continued its sharp decline. Agricultural prices had more modest declines.
Vogel Consulting, LLC (Vogel) Tactical Recommendations
We expect financial markets will experience periods of choppiness in the near-term as economies continue to deal with recovery from COVID related impacts particularly with supply chain issues and shortages that are disrupting production and delivery of goods and services and leading to price hikes across industries. Even though the rate of economic growth may slow from the levels following the initial reopening of economies after the pandemic shutdowns, demand remains robust and is likely to grow as the spike in Delta variant cases eases. In addition, the consumer sector appears to be strong with jobs plentiful and wages rising. However, since valuations are full, financial markets could be vulnerable to disappointing news. Therefore, we continue to prefer to have a diversification of exposure to sectors benefiting from secular growth trends along with some exposure to cyclicality to participate in economic growth. Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international and emerging market equities. Within our fixed income recommendation, we continue to favor short to intermediate maturities. We continue to recommend an underweight allocation to hedge funds. We recommend keeping at least a year of cash reserves to avoid having to raise cash during a period of market volatility.
The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions. These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance. Past performance does not guarantee future results.
The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group. An index is not managed and is unavailable for direct investment.