Mary Ann Drucker, Assistant Portfolio Manager, discusses the resiliency of the U.S. equity markets despite current events.
September Stock Market Update Transcript
Hello, this is Mary Ann Drucker here with our video market update for September 2021.
The resiliency of the U.S. equity markets continues to impress. In spite of elevated unemployment numbers, higher inflation, and the Delta variant spreading through many parts of the country, the S&P 500 Index of large U.S. companies continues to hit new highs as this chart shows. Historically, stocks have produced negative to flat returns during the month of August, but the S&P 500 went against that grain by posting a positive 3% return with dividends. This was in spite of several news events that threatened to upend the markets. One such event was the fall of Afghanistan to the Taliban. Another hit closer to home when Fed Chairman Powell signaled when the Fed might begin to end its economic stimulus, a process referred to as tapering.
During the economic crisis brought on by the pandemic last year, the Fed injected liquidity into the system by purchasing assets such as treasuries and mortgage-backed securities. Now that the economy is well on the way to recovery, there’s less of a need for the Fed to supply easy money. Tapering refers to the Fed reducing the amount of bonds it purchases every month. Fed Chairman Powell indicated that this process might begin before the end of the year with an official announcement coming as soon as the Fed September meeting.
Chairman Powell’s comments at the end of August include a separate, but perhaps more important, topic for the markets, and that is when will the Fed hike interest rates. Well, the markets rallied when Fed Chairman indicated that there was still much room to cover before the Fed would begin to raise rates. When yields began to rise at the end of last year into 2021, there was fear of a repeat of the taper tantrum of 2013 when a sudden spike in treasury yields created a panic in the markets. Interest rates tend to rise when inflation rises or in anticipation that the Fed might hike rates sooner than expected. Both of these events occurred earlier this year. The Feds’ belief that the current rise in inflation is only temporary, coupled with reassuring words that we’re nowhere near rates being raised, helped to calm the markets in August and push the month into a positive close.
So what changes did FSA make in the portfolios during the month of August? Fortunately, our equity-oriented portfolios entered the month already with their equity exposure at the upper limits, so the portfolios were able to participate in the market rally. When the equity exposure is at its upper limit, there really is only tweaks that we might make to the portfolios. Some of the tweaks we made in August were shifting from small caps into large caps and also adding to growth versus value-oriented stocks.
With the major U.S. stock indices hitting new highs in August, one might wonder what is left to push stocks higher. If equities can make it over the hurdle of a historically weak September and get into the final months of the year which are historically positive, that could give a boost to equities. Also, if the U.S. House of Representatives pass the $1 trillion infrastructure bill that the Senate approved in August, that could give a boost to the economy. That approval is expected in October, and that could help push the market into a positive close for the year.
Well, that’s it for this video market update. If you have any questions or comments, please don’t hesitate to call or email us. Until next time, thank you for watching.