September 2021 Market Perspective
August was another solid month in the world’s equity markets, with the U.S. markets hitting several new all-time highs during the month. By month’s end, the Dow posted a gain of 1.5% and the S&P 500 was up more than 3%. The tech-heavy NASDAQ got back on track after some recent volatility gaining more than 4%. The developed foreign equity markets gained 1.76% while the emerging markets were up an average of 2.65%.
Despite the stellar performance, August also was a turning point in terms of risks. Heightened COVID concerns, especially with the delta variant, and rising prices throughout the economy have weighed in consumer confidence, causing the consumer confidence index to fall to a 6-month low. This follows an even sharper decline in the University of Michigan’s consumer sentiment index, which plunged to its lowest level in more than a decade. We believe this is important to investors as consumer spending accounts for more than 2/3 of the gross domestic product (GDP) and has powered the economic rebound for the last year.
The expiration of the federal enhanced unemployment benefits occurred over the Labor Day holiday. Market analysts seem divided as to whether the expiring benefits will help or hurt the labor market. Some have said that it will cause hiring to slow and further depress consumer confidence. Others state that the enhanced benefits have created a disincentive for workers to return to the job as their basic benefits, plus the federal enhancement, added to more than they otherwise would earn on the job.
The U.S. economy added 235,000 jobs in August, far off the 733,000 jobs expected and was much less than the 586,000 monthly average in 2021. The unemployment rate dropped by 0.2% to 5.2% and edged downward the number of unemployed workers to 8.4 million after a large decrease in July. Here, too, there are two ways to look at the weak August employment report. On the one hand, the weak report points to a weakening U.S. economy. On the other hand, and what markets have paid attention to, is that the weak employment report gives the Federal Reserve reason to continue its very accommodating monetary policy and not begin to reduce its monthly purchase of securities in the open market – known as “tapering.” This should help keep interest rates low for the foreseeable future.
From a historical perspective, the markets are entering two of its most volatile months of the year which makes the outlook for September quite uncertain. The markets experienced substantial selloffs at the end of 2018 and again in February and March 2020 only to rebounded in a matter of months to make new highs. But market analysts have noted that the markets have not yet experienced a 10% correction in 2021. Does that mean a market correction is coming? Yes, it does, but no one knows when.
Our perspective for the equity markets going forward is that strong corporate earnings, low interest rates and a potentially improving labor market may provide sufficient tailwinds to continue to drive U.S. equity prices higher. But as noted above, risks in the market and economy exist, and a downturn – however deep and long – can be initiated by any one of several factors. As investors, we know that the risk of market correction always has, and always will, exist. Acknowledging short-term risks does not deter us from keeping a long-term perspective of our investment goals.