Volatility Rears It's Head as Markets Decline
In September, the S&P 500 fell 4.7%, marking just the second negative month of 2021. Many catalysts contributed to the pullback, including issues with global supply chains, labor shortages, increased energy costs, rising interest rates, Chinese economic growth, and an unresolved political agenda.
What Worked & What Didn't Work
Ten out of the eleven S&P 500 sectors declined in September, as the wide breadth of issues affected virtually all areas of the economy. Cyclical sectors like Industrials and Materials each fell more than 6%, as clogged supply chains, higher commodity input costs, and slow Chinese growth weighed down returns. High-growth areas including Technology and Communication Services each fell more than 5.5%, hurt by rising interest rates and a potential change in capital gains rates. Even defensive areas like Healthcare were affected, falling 5.6% as Congress weighs regulating drug prices to pay for an increased federal spending agenda.
Energy provided the month’s only positive return, gaining 9.4%. Recovering energy demand and rebounding global growth boosted the price of many commodities, including widely used resources like natural gas and oil. U.S. natural gas prices have more than doubled since April (Henry Hub Spot Price), while U.S. oil prices have risen 25% during the same period (WTI Spot Price).
What We're Watching
Many of September’s challenges will linger into the final quarter of 2021, and some will persist into 2022. Tax policy may be the first to be resolved, as fiscal deadlines are approaching quickly. A successful infrastructure bill and a scaled-down U.S. budget would likely be well-received by the stock market. Supply chain, labor, energy and international challenges will take longer to heal, but fortunately U.S. consumer demand, which make up more than 2/3 of U.S. GDP, is very strong and should continue to get stronger as new COVID-19 cases decline again. Ultimately, business with diversified revenue streams and strong operational management will come out on top, eventually translating to positive stock market results.
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