The September stock market slump reveals a messy underside

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Markets slumped towards the end of the quarter, causing the S&P 500 to experience its worst monthly pullback since the pandemic-driven sell-off in March 2020

Stocks started the day higher, only to plummet in the hours that followed. The S&P 500 fell 1.2% to 4307.54 Thursday, losing almost all of its gains for the quarter. The Dow Jones Industrial Average lost 1.6% or 546.80 points to 33,843.92 and suffered its first quarterly loss since the first three months of 2020.

It was hardly the bullish end of the quarter that investors had been hoping for – and a day that made many wealth managers nervous as they entered the final months of the year.

Central bankers who thought this year’s rise in inflation would be a short-term phenomenon aren’t sure how long the temporary pressures will last. Strategists who had forecast another strong quarter of economic growth are cutting estimates due to supply chain bottlenecks and the highly contagious Delta variant of Covid-19. The economic data also fell short of expectations. City group‘S

The Economic Surprise Index, which shows how much US reports have exceeded or fallen short of estimates, fell this month to its lowest level since June 2020.

The month proved to be a major setback for stocks as all but one of the 11 sectors of the S&P 500 closed lower in September.

All in all, the S&P 500 is still up 15% over the year, winning a sixth straight quarter. The index is only a few percentage points away from its record close at the beginning of September.

“Sometimes the narrative is clear and simple,” said Keith Lerner, co-chief investment officer, Truist Advisory Services. But now: “I have the feeling that you have to find opportunities in a market where everything no longer comes together.”

While Mr. Lerner is still betting on long-term rising stocks, his company has scaled back its exposure to emerging markets and focused heavily on the US, where he expects the economy to be most resilient even if the global recovery slows.

One of the most annoying topics for investors and analysts in recent months has been how quickly the market mixed up winners and losers.

In the year to date, companies have posted solid profits despite rising raw material and labor costs. The floor of the New York Stock Exchange on Tuesday.


Richard Drew / Associated Press

The markets behaved relatively predictably in the first half of the year. Investors favored stocks in cyclical-sensitive companies like banks, manufacturers and airlines, and turned down relatively expensive tech stocks when it looked like the introduction of Covid-19 vaccines would help fuel the economic recovery.

This quarter, when so-called reopening trading stalled, it became more difficult for investors to choose dominant trades. Tech stocks rallied, but then took the brunt of market selling in early September and this week – bringing the S&P 500 Growth Index to its largest monthly pullback since March 2020.

The bond market has also surprised many investors. US 10-year Treasury yields fluctuated in a tight range for much of the quarter, only to see a six-day rise above 1.50% between last week and Tuesday, according to the Dow Jones. the largest such increase since June 2020 market data. The move came after the Federal Reserve announced it would begin rolling back its pandemic stimulus programs as early as November and considering hike rates next year amid spike in inflation.


What do you think the end of the quarter means for the rest of 2021? Join the conversation below.

“While there is all this resilience debate going on, subsurface churn has shown more weakness,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Ms. Sonders attributed the rapid rotations in the market to a variety of investor concerns.

“You have virus concerns, then add debt ceiling concerns, some arguably more mixed economic data lately. [and] Uncertainty about monetary policy, ”she said. “I don’t know if we’ll be leaving this mode anytime soon.”

Another issue that weighs on investors: inflation.

The US inflation rate recently hit a 13-year high, sparking debate over whether the country is entering a similar inflation period to the 1970s. WSJ’s Jon Hilsenrath examines what consumers can expect next.

In the year to date, companies have posted solid profits despite rising raw material and labor costs. S&P 500 company earnings have exceeded analyst estimates by double-digit percentages since Q2 2020, according to Morgan Stanley stock strategist Michael Wilson. This contrasts with an average beat rate of 5% since 2008.

With supply chain disruptions and labor shortages across the country, Wilson said it’s hard to believe companies can maintain this momentum.

According to FactSet, between June and September 224 S&P 500 companies included inflation in their earnings calls for the second quarter. That’s the highest number since FactSet started tracking the data in 2010.

In the past, profit margins have shrunk when a relatively large number of companies mentioned inflation, Wilson said.

Investors are faced with a big question: how much of that is already priced in in the markets?

“I’m a little worried about 2022,” said Karyn Cavanaugh, chief investment officer of Carolinas Wealth Management. “If we don’t see the double-digit increases we’re used to, the markets will be asking, ‘Hey, what have you been doing for me lately?’ ”

Ms. Cavanaugh has advised clients to focus on wide moat stocks – companies with a strong track record, whether growth is slowing or accelerating because they have a competitive advantage over their peers.

Given so many potential issues remain unsolved, from debt negotiations and possible changes to Washington’s tax law to the pandemic, Ms. Cavanaugh said she expected the market’s path to be bumpy from here.

“We could do a bit of sanding,” she said.

What is happening in the markets?

Write to Akane Otani at

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