Jordan Daugherty, Investment Analyst, presents our September video market update and shares what FSA is doing to respond.
September Stock Market Update Transcript
Hello, I’m Jordan Daugherty, and this is your September market update from the Investment Team here at FSA. Hopes for a new bull run were driving sentiment higher after the summer’s comeback rally. However, we’re seeing the return of volatility and downside risk putting pressure on the recent gains. Cracks appeared in the bond sectors at the beginning of August. The U.S. Aggregate Bond Index sank nearly 3% for the month. Traditionally safe bond sectors all felt the pain. MUNIs were down 3% while investment grade corporate debt was down 5%, and long-term treasuries were down 8%. Bond prices struggled as rates re-entered their uptrend. Ten year treasury rates started August at 2.65% and ended at 3.13%. Stocks started their nine-week rally in mid-June with small caps leading the way. The S&P 500 gained over 17% from June to mid-August. Since then, stocks have spent the last three weeks giving it back, dropping 9%.
These big rallies are common during a bear market. For example, during the 07-08 financial crisis, stocks saw three major rallies on the way to bottoming in March 2009. One rally jumped 24% before sliding further down. No one can time the bottom of a down market precisely which is why FSA uses caution when making allocation decisions. This protects the portfolios from sharp reversals, but it also keeps your portfolio flexible so you can participate in new bull markets as early as possible. Mixed messages continue to obscure the direction of our economy, and this has serious implications on financial markets. On one hand, we have a strong labor market. We’ve seen a rebound in consumer confidence and COVID cases have decreased substantially worldwide, but we still face headwinds as our policymakers continue to enact measures that reduce inflation rather than focusing on growth. The Federal Reserve continues to raise rates which increases borrowing costs across the board.
They’ve also enacted quantitative tightening which will reduce assets held by the Fed, and this could turn out to be quite restrictive for the credit markets and the economy as a whole. An underappreciated story of the year has been the strength of the U.S. dollar. The U.S. Dollar Index is up 15% year to date and recently peaked at 110, a level untouched since a two-year run from 2000 to 2002 where the dollar topped out at 120. Eclipsing that was a run nearly 40 years ago when the dollar sustained a multi-year rally that peaked around 160 in 1985. The Dollar Index is measured against a basket of six major currencies that include the euro, the Japanese yen, British pound, Canadian dollar, Swedish krona, and the Swiss frank. In the short term, a strong dollar helps offset domestic inflation by boosting purchasing power which lowers prices on imported goods and services. Foreign markets, however, may find it difficult to manage a more expensive dollar, and this poses potential systemic risks that we’ll be watching closely.
The rally this summer was strong, strong enough for us to gradually move portfolios back into the market, but the late August reversal has caused us to pause that process. A sustained break in the S&P 500 level of 3,900 will trigger most of the FSA safety nets to convert most equity positions back into cash and money market holdings. Our team is constantly combing through investment data to identify new opportunities. A couple standouts have been managed futures funds, as well as solar energy companies. A solar ETF we added to one of our tactical strategies has been in a serious up trend, as you can see here, up almost 40% since May. This ETF has holdings in 41 solar-related stocks, about 50% of which are American companies.
Well, that’s it for this market update. Thank you for watching, and we’ll see you next time.
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