September is historically the worst month of the year for stocks, and it proved it in a big way this time. The S&P500 finished September with a loss of 4.8% but squeaked out a gain of .2% for the 3rd quarter 2021. It was widely anticipated that some profit taking was likely near as the S&P500 was up the previous seven months in a row. The S&P500 is now up for six quarters in a row. September may be the worst month of the year, but October is historically the most volatile, and October has acted true to its history so far.
We are now approaching November and December, which are usually two of the better months. As a whole, the 4th quarter has averaged a gain of 3.9% since WWII and is up 80% of the time.
The market has had a lot thrown at it this year with the Covid-19 delta variant, supply chain disruptions, a chip shortage, Fed tapering concerns and inflation concerns, among many other things. There has been enough concern that one might wonder why the market has done so well. Well, a reminder that the fundamentals always win over time. Of course, market commentators will bring up many other things that may cause concern, but generally, the only two things that matter to the market long term are earnings and interest rates. Interest rates remain near historical lows, and they are the cost of capital to run, start or grow a business. Corporate earnings have been nothing short of spectacular as the economy reopens from the depths of the pandemic. In our opinion, low interest rates and solid earnings growth justify current market valuations. Price to earnings ratio is one measurement of valuation but higher growth rates justify a higher P/E.
The fear of inflation is real and all consumers can feel it. There is an argument that it is transitory and will subside over time. Low inventories created by the pandemic and supply chain disruptions were met with a tremendous increase in demand, which has driven prices higher. A reminder that higher inflation, and higher interest rates that could follow, are not necessarily bad for the market until they reach levels that start to curtail economic activity. For now, the underlying fundamentals of low interest rates and strong corporate earnings should keep this bull market alive for quite some time.
The market does not move based on expectations. It is a variance from what is expected that can cause sharp moves. The market fully anticipates that the Fed will begin to “taper” its bond buying activity even this year, so we believe that is already built into expectations. Even if they begin to taper, it is estimated they would still buy roughly $600 billion in bonds the first six months of next year. There will still be plenty of liquidity available to the market.
Though volatility will arise from time to time, we remain intermediate to longer term bullish. We believe liquidity, low rates and earnings will continue to drive the market for the foreseeable future.