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3rd Quarter 2021 Market Commentary: Ever-Bearance

Data Source: Bloomberg

To read full market commentary, click here.

September 2021 Highlights:

  • During the course of the 3rd quarter, global equity markets had been advancing higher despite lingering concerns over COVID delta variant infection rates and regulatory crackdowns from the Chinese government that saw double digit declines across technology and consumer discretionary sectors.  Then a one-two combination punch of China Evergrande and hawkish Federal Reserve comments followed by an energy spike uppercut took much of the bloom right off causing global equity markets to end in negative territory for the month and moderately down for the quarter.
  • For the month of September, global equities (MSCI All-Country World Index or ACWI) declined 4.1%, with the S&P 500 and MSCI Europe leading the decline (-4.7% and -4.8%, respectively) followed by MSCI Pacific ex Japan and Emerging Markets (both down 4%) while Japan outperformed (+2.8%).
  • Within the U.S. market, September saw a reversal of the U.S. large cap growth outperformance that had driven July and August’s advance. S. large cap growth underperformed smaller caps and value with most of that underperformance coming late in the month following the Evergrande news and energy price spikes across Europe.  For the month, U.S. small caps (S&P 600) returned -2.4% ahead of the -4.7% of the S&P 500 while S&P Pure Growth dropped 5.3% underperforming Pure Value (-1.7%).
  • Technology, Financials, and Consumer Discretion led major sectors, but this month’s downturn was broad based as traditional growth sectors (Healthcare, Technology, Communication), cyclical value sectors (Materials, Industrials) and interest-rate sensitive sectors (Utilities, Real Estate) underperformed the S&P 500. The Energy sector benefited from higher oil prices while Financials benefited from higher interest rates and a steeper yield curve.
  • High Quality was the worst performing factor in September followed by Minimum Volatility and High Dividend as the former did not benefit as much from higher commodity prices and higher interest rates while the latter were hurt by higher interest rates. Momentum and Value both benefited from energy and financial sector exposures, the larger beneficiaries of post-pandemic recovery and higher interest rates.
  • Interest rates rose towards the end of the month in response to perceptions that inflationary pressures are proving to be less ‘transitory’ and the Fed pivoting towards a more hawkish posture by communicating November as the likely start for balance sheet tapering. During September, the 10-Year U.S. Treasury yield dropped as low as 1.28% but spiked to 1.54% towards the end of the month before settling at 1.49%.
  • The Bloomberg/Barclays US Aggregate Bond Index dropped 0.9%, primarily hurt by the rise in interest rates. S. high yield was flat as the segment did not experience as large of a sell-off as equities; investment grade and high yield credit spreads (Figure 17) briefly widened following the Evergrande news but then narrowed back to their post-pandemic low levels.
  • Within equity alternatives, commodities performed well on the heels of higher oil prices. Real estate was hurt by the broader equity sell-off and higher interest rates while precious metals (primarily gold) lagged due to the rise in real (inflation-adjusted) interest rates.  Platinum and Palladium are also underperforming due to the pullback in auto production blamed on semiconductor shortages.
  • Despite the optimism over COVID tracking and earnings growth, earnings-based valuation multiples continue to contract from the early 2021 peak levels. Perhaps, the market is trying to price in some level of normalization from peak COVID recovery activity as well as price in some uncertainty of more hawkish central bank policy shifts that could result in higher interest rates down the road. In other words, it’s becoming more of a ‘show-me’ market where higher valuations will only come with demonstrably higher earnings growth, ‘transitory’ inflation notwithstanding.

To read full market commentary, click here.

By: Benjamin Lavine