September Doldrums and Supply Chain Issues
September has historically been the worst month for stocks, according to St. Louis Federal Reserve data measuring monthly S&P 500 performance over the last 50 years. While analysts have offered various explanations, no one has pinpointed the reason we sometimes see seasonal weakness as summer concludes. CNBC published an article on September 1st stating that this year may buck the trend and be a positive month for stocks… It wasn’t.
Look no further than the table of Key Index Returns. The S&P 500 Index fell 4.8% in September. It was the first monthly decline since January and the worst decline since March 2020 when the COVID-19 lockdowns began.
Key Index Returns
|Dow Jones Industrial Average
|S&P 500 Index
|Russell 2000 Index
|MSCI World ex-USA*
|MSCI Emerging Markets*
|Bloomberg Barclays US Aggregate Bond Total Return
MTD: returns: August 31, 2021—September 30, 2021
YTD returns: December 31, 2020—September 30, 2021
It’s concerning when you open up your statement and see a drop from one month to another, but it’s important to consider a couple of things.
- Markets do not go up in a straight line.
- There may be more drops. A 4.8% drop is modest by market standards. In fact, we’ve yet to shed 10% since the bull market began in late March 2020, which would be considered a “correction” by analysts. As we’ve noted in the past, stocks tend to take the stairs up and the elevator down. If we are headed toward an overdue correction, pullbacks tend to be short lived.
- While September was a down month, the market is still up for 2021 and that’s off of a strong 2020.
Peaking at a new record on September 2, the broad-based S&P 500 Index began a pullback that can be tied to a number of factors.
- The economy is not contracting, but the slowdown has been more pronounced than expected. The Atlanta Fed’s GDPNow model suggests that Third Quarter growth is tracking at just 2.3%, which is less than expected.
- While cases have slowed recently, the pandemic refuses to go away and the still high COVID-19 cases are causing some hesitation in industries that are dependent on face-to-face transactions.
- Inflation. Marc Zandi, an economist at Moody’s, calculates that inflation will add $175/month in expenses for the average American family.
- Supply chain bottlenecks, which seem to be getting worse. This Wall Street Journal story does a great job of explaining it with a hot tub analogy. Supply chain issues are not new, but as the graph below shows, we saw an uptick starting in 2020 and a sharp increase recently.
- Finally, an energy crisis is brewing in Europe, while natural gas prices hit new highs in Asia. They are running about six times what we see at home (Reuters). The U.S. isn’t directly affected, but these are costs that may get added to manufactured goods or could restrict output, adding to supply chain woes.
Note: It seems like the debt ceiling and China’s Evergrande real estate issue have dropped off of the list of things to be concerned about. They reserve the right to be added back if necessary.