Market Monitor: September Update
Headlines and Highlights
- Fed signals taper likely starting soon: Federal Reserve officials indicated they are poised to slow the monthly asset purchases that the central bank has been making throughout the pandemic as soon as next month as the economy moves back toward normal. Their projections showed they also could raise interest rates as soon as late 2022, depending on the economy’s progress.
- Congress averts shutdown but still locked in fiscal disputes: Congress approved a measure to fund the government until early December hours before the end of the fiscal year on September 30th. The funding stopgap prevented a government shutdown while leaving politicians at loggerheads over key legislation involving the debt ceiling, spending and tax hikes.
- Markets ride out rocky month: Stocks and bonds both had a down September amid worries about central bank tightening, the debt ceiling, COVID-19, inflation and Chinese real estate developer Evergrande’s $300 billion debt debacle. The S&P 500 had its first monthly decline since January and REITs also fell sharply; both retained double-digit gains for 2021. Bond prices declined when the Fed’s tapering announcement sent the 10-year Treasury to 1.5% from 1.3%.
Select Market Returns
Sources: Morningstar, Altair Advisers
- Despite slowing growth, the U.S. economy continues to show resilience in the face of the lingering threat from COVID-19. Consumer sentiment and retail sales have both risen recently and leading economic indicators collectively are trending higher, pointing to accelerating growth in the fourth quarter. The possibility of another surge in the pandemic remains the biggest threat, especially as the weather gets colder and we approach flu season, but the recent downturn in cases reinforces our positive outlook.
- The labor market recovery is still progressing despite being restrained this fall by the Delta strain. It is too soon to say whether people will return to the work force in significantly larger numbers now that enhanced unemployment benefits have ended and kids have returned to school. The slow return so far is weighing on companies’ bottom lines, but we expect gradual improvement to continue.
- Inflation persists at a level well above average and now appears likely to remain elevated well into next year until supply-chain bottlenecks are resolved. The reopening- and pandemic-related disruptions that have caused the price pressures are not long-term issues, however, and the surge appears to have peaked. We do not expect the economy’s health to be jeopardized.
- The Federal Reserve remains dovish and committed to maintaining monetary policies that are supportive of the economy even as it prepares to begin tapering by year’s end. More choppiness in markets is likely as the transition proceeds, but the Fed is not raising rates any time soon or abandoning its ultra-accommodative approach.
- The corporate tax increase being debated in Congress will cause expectations for next year’s earnings to be reduced by a modest amount but we do not anticipate it will have a material impact on markets. The Democrats’ proposed hike of 26.5%, while up from the current 21%, is below both the originally discussed 28% and the 35% rate that existed until 2017.
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