Here Comes Santa Claus

Oct 4, 2021

By Ben Norris, Securities Research Analyst, Associate Vice President

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September has been an historically rough month for stock market performance, and September 2021 kept that trend alive. After seeing positive performance in each of the seven months prior, the market probably needed to take a month and catch its breath. The S&P 500 Index (SPX) finished September down 4.76%, notching the worst monthly performance since September 2020. The Dow Jones Industrial Average and the Nasdaq Composite followed suit and fell 4.29% and 5.31%, respectively. Still, investors have a lot to be happy about so far in 2021. Year to date, SPX is up nearly 16% through the end of September versus an average annualized return of 10.7% over the last 30 years. When you consider all the events and headlines that have had the potential to tank markets in 2021, a 16% gain going into what is an historically strong quarter for market performance is a pretty good place to be. As we noted two weeks ago, while September can be a lump of coal in investors’ stockings, the final three months of the year have generally seen strong returns. October and November have averaged 0.92% and 1.48% monthly returns over approximately the last 40 years, while December often rides a “Santa Claus Rally” (referencing historically strong returns in the final week of the year) to an average return of 1.11%.

Some of the weakness last month can be attributed to stronger U.S. Treasury yields. The 10-year yield climbed above 1.50% for the first time since June while the 30-year yield eclipsed 2%. Higher bond yields tend to mean weaker relative performance for growth stocks as investors perceive their future profits to be worth less as a result. The S&P 500 Growth Index (SPXG) fell 5.10% in September, while the S&P 500 Value Index (IVX) fell just 2.01% for the month. Last month was a particularly weak period for growth stocks, which were led lower by the Technology and Communication Services sectors, returning -5.82% and -6.59%, respectively. Basic Materials was the worst performing sector last month, losing 7.43%, as precious metal prices retreated. In contrast, stocks in the Energy sector performed very well in September as crude oil prices approach $80 per barrel and natural gas surged. The sector was the only positive performer for the month, gaining 9.28% for its best performance since February of this year. Consumer-related stocks outperformed on a relative basis as consumer confidence and inflation data were good enough to stave off investor fear of a household spending pullback for now. Financial stocks also held up well as higher bond yields, and thus higher interest rates, generally mean improved profitability prospects for the sector.

In addition to poor seasonality affecting market returns in September, there were several other concerns that likely share responsibility for the pullback last month. The ongoing legislative standoff (between both progressive and moderate Democrats as well as between Democrats and Republicans) over both a potential infrastructure package and a looming debt ceiling has stoked investor concern. Passing of an infrastructure spending deal has been a key point that investors have looked to as they seek to justify continued market gains. Despite bipartisan support, the deal continues to face delays. Separately, a technical default on debt by the U.S.  government could have potentially disastrous long-term effects on the U.S. economy and would certainly spook markets. Treasury Secretary Janet Yellen has warned that Oct. 18 is the deadline to raise the debt ceiling.

Outside of Washington, supply-chain issues continue to ripple through the global economy with a multitude of companies warning that their financial results may suffer as a result. The Delta variant of the coronavirus remains a headwind for the ongoing economic recovery, despite recent improvements in infection rates. Flu season is just around the corner and has the potential to further complicate the situation as intensive care units remain overwhelmed in some areas. Rising energy costs are an overall headwind for markets with the national average price for a gallon of gas exceeding $3. Similarly, the cost of natural gas has surged over the last few months, with prices up nearly 100% year-to-date. Consumers will almost certainly pay more to heat their homes this winter and may spend less on discretionary items as a result. Finally, after months of speculation, the Federal Reserve has indicated that it is nearly prepared to begin tapering its $120 billion monthly bond purchase program. Fed Chairman Jerome Powell said that there is broad support from Fed officials for a tapering that would wrap up sometime in mid-2022. The market has largely expected this pronouncement from the Fed, but Treasury yields have risen nonetheless. The next logical step toward a normalization of monetary policy after asset purchases conclude is an increase in interest rates and the Fed is currently projecting at least one rate hike in 2022.

The final quarter of the year is set to be jam-packed with market-moving events and a closely watched third-quarter earnings season quickly approaching.If lawmakers in Washington can get their act together and the Covid-crisis continues to improve, markets may be on Santa’s nice list for the rest of the year. However, if lawmakers manage to bungle the debt limit debate or if Covid cases surge alongside the flu season, investors should be prepared for some time on the naughty list.

The coming week features a variety of economic announcements worth keeping an eye on. The focus of the week will likely be employment data as the Fed weighs its decision to taper bond purchases.

Date Report Previous Consensus
Monday 10/4/2021 Factory Orders



Tuesday 10/5/2021 Trade Deficit



Services Purchasing Managers’ Index



ISM Services Index



Wednesday 10/6/2021 ADP Employment Report



Thursday 10/7/2021 Initial Jobless Claims



Continuing Jobless Claims (week prior)


Consumer Credit



Friday 10/8/2021 Nonfarm Payrolls



Unemployment Rate




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