Hello all – we hope you had a nice September. Hard to believe we’re already in October.
It wasn’t a good month for the markets. In fact, it was the worst month in a year-and-a-half. The Dow fell 4.3%, the S&P 500 lost 4.8%, and the Nasdaq, which has a higher concentration of technology companies, was off 5.3%.
It wasn’t a good month for the markets. In fact, it was the worst month in a year-and-a-half. The Dow fell 4.3%, the S&P 500 lost 4.8%, and the Nasdaq, which has a higher concentration of technology companies, was off 5.3%.
Stocks trended lower early in the month and like so many of the previous months, had a sharp drop in the middle of the month. It quickly rebounded higher, just like previous months, but then reversed course again to close the month lower. It was a very frustrating month for investing.
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There were a few different news items contributing to the market decline.
We’ll start with Washington, which grabbed a lot of headlines as politicians were very busy this month (that’s never a good thing).
First, there was a fight over the government funding bill in order to prevent a shutdown on October 1st. After a lot of bickering, this was resolved at the last minute.
Then there is the debt ceiling fight, which looks like it may have a mid-October deadline. Similar to the government shutdown fight, this adds some volatility to the markets and is likely to be resolved at the last minute.
Finally, there was the proposed “infrastructure” bills (we use quotation marks since there’s not much traditional infrastructure in there). These bills introduce a lot more government spending and a lot more taxes. This is a concern for businesses and for investors who are almost certain to see higher taxes on their investments. These higher taxes will be a headwind for the markets.
We’ll start with Washington, which grabbed a lot of headlines as politicians were very busy this month (that’s never a good thing).
First, there was a fight over the government funding bill in order to prevent a shutdown on October 1st. After a lot of bickering, this was resolved at the last minute.
Then there is the debt ceiling fight, which looks like it may have a mid-October deadline. Similar to the government shutdown fight, this adds some volatility to the markets and is likely to be resolved at the last minute.
Finally, there was the proposed “infrastructure” bills (we use quotation marks since there’s not much traditional infrastructure in there). These bills introduce a lot more government spending and a lot more taxes. This is a concern for businesses and for investors who are almost certain to see higher taxes on their investments. These higher taxes will be a headwind for the markets.
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A lot of the focus this month was on the Fed, too. They’ve been talking about pulling back on their stimulus for quite some time, but this month they seemed to indicate they would begin the process in November.
They’re currently printing $120 billion a month to buy bonds to keep borrowing rates down and in November they will start reducing the amount of money they print. This money makes its way into the market and supports stocks, so a reduction will also be a headwind for the markets. This added to the downward pressure this month.
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We haven’t talked about China much recently, but they also contributed to the decline in the markets.
The largest property developer in China found itself in trouble this month and was unable to pay some of its debts. Financial troubles are not uncommon in China, but the government often steps in to help out. The government showed no willingness to help this time and investors were worried more business defaults were likely to follow.
In the end, the company made some payments to its Chinese debtors but made no payments to anyone outside China. The government didn’t seem to see anything wrong with that - and that could be a problem for its foreign relations.
This issue has not been fully resolved and we’re likely to hear more from them in the coming weeks.
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Recent high energy prices around the globe are also a serious issue that haven’t gotten much attention in the U.S.
Europe has been hit especially hard. Coal and natural gas prices have risen exponentially in the region. A push for “green energy” has led to less reliance on traditional energy sources, but the green energy hasn’t been able to provide enough power. Low supply and high demand, as well as transportation issues, have led to record-high prices and shortages all across the continent.
China is in a similar boat as they have instituted lower energy-consumption targets. Power outages were common this month as prices soared and regional governments limited power usage. Not only is that inconvenient for the people, but many factories were forced to shut down for long periods of time. For the first time since the pandemic started, the Chinese manufacturing sector actually contracted last month.
The U.S. is following a similar path as the government requires more “green energy.” Natural gas prices have risen sharply and oil is at the highest level in three years. These shortages are expected to persist through the winter, so be prepared for higher energy prices. These green policies are a big headwind for the economy.
The U.S. is following a similar path as the government requires more “green energy.” Natural gas prices have risen sharply and oil is at the highest level in three years. These shortages are expected to persist through the winter, so be prepared for higher energy prices. These green policies are a big headwind for the economy.
Worries about high energy prices reflect a broader concern about rising inflation. By all accounts, inflation is at or near its highest level in more than a decade.
CPI, which measures inflation at the consumer level, took a slight turn lower over the past month, but it still stands near the highest level since 2008.
CPI, which measures inflation at the consumer level, took a slight turn lower over the past month, but it still stands near the highest level since 2008.
Inflation at the business level, or PPI, has risen to its highest level in 11 years.
Many businesses are warning about this inflation and are passing on the higher prices to customers.
Take a look at how much it costs to ship a container from China to Los Angeles. Last month we reported it cost about $11,000. Now it costs more than $20,000!
There are growing concerns for the broader economy, too. GDP projections for the third quarter have continued to decline.
Stagflation has become a popular word again as investors worry about lower economic growth and high inflation.
The employment picture is weakening, too, as fewer jobs were added last month.
This is remarkable as there is a record amount of job openings.
The trends in the economy are concerning. We are hopeful that these trends reverse, but fear that the economic proposals out of Washington will only create more headwinds.
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Where does the market go from here?
This is a tough call. The fall is the most volatile period for the markets and September lived up to that billing. Stocks are on the oversold (or cheap) side from a short-term perspective, but it’s not easy to stick your neck out too far here.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
