Monthly Market Review September 2021

By: Andrew J. Willms

President and CEO, The Milwaukee Company

Strong corporate earnings growth provided all the support investors have needed to push stocks higher in August. The S&P 500 scored an earnings growth rate of 95.4%, which amounts to the largest increase since the fourth quarter of 2009.

Jim Picerno, The Milwaukee Company’s director of analytics, observed the following in a recent post for The Capital Spectator blog:

“The resurgence in coronavirus cases, hospitalizations and fatalities in the U.S. hasn’t taken a bite out of third-quarter growth estimates, at least not yet. Revised data continues to show Q3 nowcasts remain on track to post a strong gain, based on the median nowcast for several estimates compiled by CapitalSpectator.com. Output is projected to increase 5.1% for the July-through-September period - unchanged from the median estimate published two weeks ago. … The rebound in the pandemic blowback will likely keep any policy changes by the central bank on hold until the situation stabilizes.”

Meanwhile, the Federal Reserve continues to assert that it has no plans to raise interest rates, at least for now. But with the U.S. economy largely reopened, and the economy on strong footing, the justification for the Fed’s continued domination of the bond market is questionable. Perhaps the Fed feels there is no reason to fear its manipulation of interest rates. Then again, as the Skipper[1] of the S.S. Minnow will tell you, it’s best to proceed with caution when entering into unchartered waters.

Economic Highlights.

The Labor Department’s July 2021 jobs report showed U.S. employers added 943,000 nonfarm jobs in July, while economists, on average, had expected a gain of 862,500. The unemployment rate also declined, from 5.9% in June to 5.4% in July – the lowest since March 2020.
After 3 months of consecutive declines, new home sales rose 1.0% in July to an annualized rate of 708,000, above market estimates of 697,000. New home prices continue to rise as well, up a staggering 18% from a year ago.
Business owners are raising compensation to its highest levels in 48 years to attract qualified workers. However, the net percent of owners raising average selling prices was down 1 point after reaching its highest level since 1981 last month.

Gross domestic product rose at a revised 6.6% annual pace in the second quarter, which was a bit faster than previously estimated, but not enough to materially change the growth trend that began when the economy first reopened.
Consumer confidence, as measured by the Conference Board Consumer Confidence Survey, fell in August to its lowest level in six months. According to the Conference Board: “Concerns about the Delta variant - and, to a lesser degree, rising gas and food prices - resulted in a less favorable view of current economic conditions and short-term growth prospects.”

Stock Market Highlights.

The Nasdaq 100 index continues to climb to new highs, hitting 15,000, for the first time in August. The index is now on pace for its 13th consecutive positive year.
The S&P 500 is doing its best to keep up with its tech-heavy brethren, rising above 4,500 for the first time last month.
Valuations have also continued to rise, leading some to suggest stock prices may be close to hitting a ceiling.
- Since 2000, an average of 181 companies with a minimum $100 million market cap traded at over 15x sales in any given week.
- That number hit 600 recently, according to The Novel Investor.
- But history suggests that may not be a good thing.
- In fact, according to The Novel Investor, a portfolio holding a basket of stocks trading at such high prices would have lost money from January 2000 to today, and at one point would have suffered a 92% drawdown. Not many investors have the fortitude needed to stay invested under those circumstances!

Bond Market Highlights.

The Bloomberg Aggregate Bond Index slipped 0.2%, the first monthly decline for the benchmark since March.
Three non-voting members of the Federal Open Market Committee recently indicated that they back the tapering of bond purchases by the Federal Reserve sooner rather than later.
Bonds got a bit of a boost last Friday following Chairman Powell’s comments that while inflation has exceeded the Fed’s 2% target rate, “we have much ground to cover to reach maximum employment,” which is the second prong of the central bank’s dual mandate, and a necessary condition before rate hikes begin.
Chairman Powell also said that the central bank is likely to begin tapering its bond purchases before the end of the year, so long as economic progress continues.
Demand remains strong for municipal bonds, and it seems the gap between supply and demand will not narrow anytime soon. Lipper Research recently reported that there have now been 25 consecutive weeks of inflows into municipal mutual funds, with a YTD increase of $54 billion.

If you would like to hear more from me on recent market developments, please use this link to subscribe to my weekly podcast.

Thank you for reading.

[1] Okay. I’ve really dated myself with this reference.