What Caused The Market To Sell Off In September?

The stock market experienced a fairly significant drop in the month of September.  In September, the S&P 500 Index dropped 4.8% which represents the sharpest monthly decline since March 2020.   I wanted to take some time today to evaluate:

·         What caused the market drop?

·         Do we think this sell off is going to continue?

·         Have the recent market events caused us to change our investment strategy?

September Is Historically A Bad Month

Looking back at history, September is historically the worse performing month for the stock market.  Since 1928, the S&P 500 Index has averaged a 1% loss in September (WTOP News).  Most investors have probably forgotten that in September 2020, the market experienced a 10% correction, but rallied significantly in the 4th quarter.  

The good news is the 4th quarter is historically the strongest quarter for the S&P 500.  Since 1945, the stock market has averaged a 3.8% return in the final three months of the year (S&P Global).

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Delta Variant

The emergence of the Delta Variant slowed economic activity in September. People cancelled travel plans, some individuals avoided restaurants and public events, employees were out sick or quarantined, and it delayed some companies from returning 100% to an office setting.  However, we view this as a temporary risk as vaccination rates continue to increase, booster shots are distributed, and the death rates associated with the virus continue to stay at well below 2020 levels. 

 

China Real Estate Risk

Unexpected risks surfaced in the Chinese real estate market during September.  China's second largest property developer Evergrande Group had accumulated $300 billion in debt and was beginning to miss payments on its outstanding bonds.  This spread fears that a default could cause issues other places around the globe.  Those risks subsided as the month progressed and the company began to liquidate assets to meet its debt payments.

 

Rising Inflation

In September we received the CPI index report for August that showed a 5.3% increase in year over year inflation which was consistent with the higher inflation trend that we had seen earlier in the year.   In our opinion, inflation has persisted at these higher levels due to:

·         Big increase in the money supply

·         Shortage of supply of good and services

·         Rising wages as companies try to bring employees back into the workforce

 

The risk here is if the rate of inflation continues to increase then the Fed may be forced to respond by raising interest rates which could slow down the economy.   While we acknowledge this as a risk, the Fed does not seem to be in a hurry to raise rates and recently announced plans to pare back their bond purchases before they begin raising the Fed Funds Rate.  Fed Chairman Powell has called the recent inflation trend “transitory” due to a bottleneck in the supply chain as company rush to produce more computer chips, construction materials, and fill labor shortages to meet consumer demand.  Once people return to work and the supply chain gets back on line, the higher levels of inflation that we are seeing could subside.

 

Rising Rates Hit Tech Stocks

Interest rates rose throughout the month of September which caused mortgage rates to move higher, but more recently there has been an inverse relationship between interest rates and tech stocks.  As interest rates rise, tech stocks tend to fall.  We attribute this largely to the higher valuations that these tech stocks trade at.  As interest rates rise, it becomes more difficult to justify the multiples that these tech stocks are trading at. It is also important to acknowledge that these tech companies have become so large that the tech sector now represents about 30% of the S&P 500 Index (JP Morgan Guide to the Markets).

 

Risk of a Government Shutdown

Toward the end of the month, the news headlines were filled with the risk of the government shutdown which has been a reoccurring issue for the U.S. government for the past 20 years.  This was nothing new, but it just added more uncertainty to the pile of negative headlines that plagued the markets in September.  It was announced on September 30th that Congress had approved a temporary funding bill to extend the deadline to December 3rd.

 

Expectation Going Forward

Even though the Stock Market faced a pile of bad news in September, our internal investment thesis at our firm has not changed.  Our expectation is that:

·         The economy will continue to gain strength in coming quarters

·         There is a tremendous amount of liquidity still in the system from the stimulus packages that has yet to be spent

·         People will begin to return to work to produce more goods and services

·         Those additional goods and services will then ease the current supply chain bottleneck

·         Interest rates will move higher but they still remain at historically low levels

·         The risk of the delta variant will diminish increasing the demand for travel

We will continue to monitor the economy, financial markets, and will release more articles in the future as the economic conditions continue to evolve in the coming months.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.