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September in Review

October 14, 2021    Jordi Visser

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Fears over peak growth, concerns about the rising Delta variant, uncertainty around the beginning of tapering, confusion on stimulus from Washington, D.C., and credit market anxiety due to China and Evergrande each dominated price movements in the third quarter. These factors led to the first quarterly rise in volatility, as measured by the VIX, since the Covid pandemic began in first quarter of 2020. The economic data, although mixed, continued to signal that domestic growth remained strong. Job openings hovered at 20-year highs, core inflation increased at a faster pace than any year since 1991, and finally, companies reported very strong earnings. 

Assets still responded positively to this environment with equities, as measured by the S&P 500 Total Return Index (SPXT), up 0.58% for the 6th quarterly gain in a row. Commodities, as measured by the Bloomberg Commodity Index (BCOM), are up the greatest amount since 2009-2010. S&P 500 Total Return Index (SPXT) is now up 15.92% year to date, while the BCOM is up 29.09% for its best year on record dating back to 1988.  In contrast, fixed income has not been part of the asset inflation party.  The US Barclays Aggregate Bond Index was up 0.05% in the third quarter but is down 1.55% for the year. This is particularly noteworthy because fixed income has only been down three other years since 1977. With inflation stubbornly remaining at high levels, pressure on investor’s fixed income portfolio is becoming a central theme.

The portfolio managers continue to hear from companies that the labor shortages remain a major headwind for their businesses.  At the same time, bottlenecks still exist as measured by global economic data and port measurements. With winter approaching, coal, natural gas and oil prices have moved higher on the back of shortages from around the globe. Consequently, it has been increasingly more difficult to see when the “transitory” inflation will pass. Economic uncertainty has been a leading indicator of market volatility, as seen in September when both the S&P 500 Index and the iShares 20+ Year Treasury Bond ETF (Ticker: TLT) were down more than 3.0%. In fact, it is only the fourth time that both have declined by this magnitude in one month since the Great Financial Crisis.  This relationship between stocks and bonds will lead to more volatility in the coming years which will likely be a better environment for liquidity providing diversified strategies. 

The most important change within the equity market which indicates the inflection point we have been waiting for was in dispersion.  Since February, we have seen the percent of names outperforming the S&P 1500 Index move lower all the way to less than 30%.  Alpha during that period was about slower economic growth and concentration of alpha.  This is normally isolated to periods where fears of recession are growing.  In September we saw the early signs of a shift that we think will remain in place into the first quarter of 2022.  We look forward to more months like September.



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