Stocks Fall: Why and What’s Ahead

By Bill Hornbarger, Chief Investment Officer

• Yesterday (9/28) was one of those relatively rare days when most markets were softer. Stocks, bonds, gold, oil, and many other commodities were down in trading.
• The S&P 500 was down over 2%, the fourth time this year that has happened. On average, the S&P has suffered 2% or more down days, nine times per year since the Great Depression (1928).
• The S&P has yet to have a 3% down day in 2021, something that happened 16 times in 2020
• The S&P 500 is still up approximately 16% YTD and down 4% (184 points) from its all-time high. This is a relatively mild drawdown. All 11 sectors are positive YTD.
• Looking beyond the broad index, the Russell 1000 and 2000 Value indices were down less than half as much as growth counterparts today and are ahead YTD. Higher rates and the potential changing Fed policy are hitting the growth names harder. These are the stocks that have outperformed and whose valuations are more stretched.
• The markets were caught in the crossfire of several pieces of news:
  • The debt ceiling debate – This has happened previously and don’t be surprised if it goes to the very last minutes (and potentially past it) for a resolution. The headline that the U.S. is likely to hit the debt ceiling by Oct. 18 according to Treasury Secretary Yellen gives a sense of immediacy to this issue.
  • The Fed – Consensus is growing the Fed will begin tapering in the very near term – probably leads to slightly higher rates, which is not to say high rates.
  • The ongoing inflation debate – The Fed says the current, elevated inflation rate is   transitory while investors are not so sure.
  • The risks of stagflation are becoming more talked about. Will higher energy prices boost inflation and slow the recovery from the pandemic recession?
• According to a report that JP Morgan publishes annually, roughly 60% of the S&P 500’s top single-session gains occur within two weeks of its 10 largest single-session losses. This means that heading for the exit during big down days may cause you to miss out on the market’s biggest single-day rallies, which are impossible to times.
• Monetary policy remains supportive of stocks and the economy. An infrastructure bill would also be supportive of the economy.
• As we have said previously, we have been in an environment of abundant liquidity and low volatility. We are heading into a period where liquidity will be cut back slightly and questions emerge around global growth. There remains a fair amount of pent-up demand and while supply chains are fractured, that demand should remain.
• Bottom line: More volatility and uncertainty, but the conditions are still positive for stocks.

2021-2245 Exp. 09/30/22