Monthly Market Review October 2021

By: Andrew J. Willms

President and CEO, The Milwaukee Company

Commentary

September lived up to its reputation as a bad month for stocks as equites endured their worst month of the year so far. All four of the leading U.S. equity market indexes posted losses in September, as concerns about supply chains, inflation, and the Chinese property market took their collective toll.

Tech and other growth stocks were particularly hard hit, as rising interest rates cut into the present value of their expected future earnings. (Growth stocks offer the potential for higher future profits, whereas value stocks have greater current earnings.) The tech giants referred to as the FAANG group (Facebook, Amazon, Apple, Netflix, and Google (a.k.a. Alphabet) posted a monthly drop of about 4% and a quarterly decline of over 3%.

Speaking of rising interest rates, the yield on ten-year Treasuries rose 22 basis points in September to over 1.5% -- the highest level since June. As a result, bond prices took a hit (along with the ETFs that invest in them) for the usual reason: yields and bond prices move inversely. Profit-taking and inflation concerns appear to be the primary drivers of the fixed-income sell-off.

While stocks caught their breath from their extended run higher, it’s important to keep sight of the fact that stocks are still up solidly for the year. While traders have the unenviable task of trying to predict where markets go from here in the short run, investors like us can take comfort in knowing that short-term market swings have little impact on our longer-term strategies.

Economic Highlights.[1]

Total industrial production increased 0.4% in August, according to the Industrial Production and Capacity Utilization Report, released on September 15th. Growth would have been an estimated 0.3% stronger, but for plant closures and other disruptions brought on by Hurricane Ida.

After advancing for two consecutive months, sales of existing homes fell by 2% in August. Pending home sales also fell for the consecutive month, slipping by 6.3% on a year over year basis. Higher prices and a limited supply were the culprits behind August’s weak housing numbers.

The Conference Board’s Consumer Confidence Index declined to 109.3 from 115.2 in September, below market expectations of a 115.0 reading. It was the third consecutive monthly decline, with the index hitting its lowest levels since February 2021.

Retail sales increased 0.7% in August despite fears that escalating Covid-19 cases would discourage consumers and supply-chain issues would limit supply of in-demand goods.

Prices for consumer goods rose 0.3% during August, as compared to a 0.5% increase in June. The consumer price index increased by 5.3% over the last 12 months ending August 31st, as compared to an expected 5.4%.

Stock Market Highlights.

The stock market registered its worst quarterly performance since the beginning of 2020, when the Covid-19 pandemic brought Mr. Market to his knees.

The Tech heavy Nasdaq 100 index experienced its worst month since March of 2020 while transportation stocks, widely seen as a barometer of economic health, posted a monthly loss of over 3% and a quarterly decline of about 5%.

The dividend yield on the S&P 500 has moved down to 1.28%, its lowest level in 20 years and not far from its record low of 1.10% in 2000.

Bond Market Highlights.

Fed Chair Jerome Powell said the central bank would start paring its $120 billion in monthly asset purchases “soon” and end them by the middle of next year. But Mr. Powell also indicated that the Fed will continue its efforts to keep interest rates from rising.

Meanwhile central banks around the globe are beginning to raise rates due to inflation concerns. Brazil, Russia, Mexico, Turkey, Peru, Chile, Czech Republic, and South Korea have or will be hiking rates this year, and the European Central Bank announced it will be slowing its purchase of European bonds.

Inflation rates continue to outpace bond interest rates, keeping the real return generated by bond yields in the red.

Thank you for reading.

[1] Most economic data lags by a month or so.