Welcome to the weekly market update from Signature Wealth Management. I’m Brian Ransom, Research Director from Signature Wealth and here’s what happened in the market this week.
Since the bottom of the pandemic at the end of March, the S&P 500 has returned 102% including a 21% return since the start of the year. Until September of this year, we haven’t experienced a significant pullback of any kind. Currently, the month of September gave us our first -5% decline.
-5% declines are not out of the ordinary, by the way. Since 1980, the stock market has seen 31 years of positive returns during the calendar year. For 29 of those years, there has also been an intra-year decline of 5% or greater. The number of years without an intra-year decline of 5% or greater is only 2. Corrections of 5% or more throughout the year are the norm, not the exception.
In the news this week, Democrats and Republicans in the Senate agreed to a 3-month extension of the debt ceiling until December of 2021. The bill is currently heading to the House for a final vote. Facebook had a rotten week which included testimony from a whistleblower and a complete shutdown of their servers for several hours. And it appears that defaults loom large in Chinese real estate as the liquidity contagion spreads from property giant Evergrande to other real estate developers.
Despite the pullback in the market, the US economy still looks quite healthy. High yield bond spreads remain very low as we enter the final quarter of the year. If there were ever to be a canary in the coal mine, that would likely reflect a spike in high yield bond spreads similar to what we saw in 2020. A tight high yield market is indicative of a strong, growing economy.
Likewise, through the month of September, we are beginning to see investors have a stronger appetite for risk. In a risk-off environment, investors typically clamor to large cap stocks with proven cash flows. In a risk-on environment, investors are willing to take more risk on smaller companies that may be growing at a faster pace than fully developed large caps. This graph shows the performance of small caps relative to large caps. Outperformance from small caps indicates a risk-on environment and this graph will rise. Underperformance means investors are more precautionary and this graph will fall. Despite the pullback in the S&P 500 during September, we are seeing a simultaneous switch from a risk-off environment to risk-on as investors prefer the returns from small caps. This indicates that the market and the economy may be healthier than the current pullback indicates.
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1.FactSet Research Systems. (n.d.). S&P 500 (Interactive Charts). Retrieved October 8, 2021, from FactSet Database.
2.JP Morgan. “Guide to the Markets” Slide 16, Annual returns ad intra-year declines. Accessed 10/7/2021 from https://am.jpmorgan.com/us/en/asset-management/adv/insights/market-insights/guide-to-the-markets/?c3apidt=p40886527386&gclid=CjwKCAjw2P-KBhByEiwADBYWCiieN5KHjwAUY7QHr5-UIaG67TtZGyPI-BrnSIEa-EQHRxYhOVyHFRoC6ugQAvD_BwE&gclsrc=aw.ds
3.Ice Data Indices, LLC, ICE BofA US High Yield Index Option-Adjusted Spread [BAMLH0A0HYM2], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/BAMLH0A0HYM2, September 30, 2021.
4.FactSet Research Systems. (n.d.). S&P 600 Small Caps (Interactive Charts). Retrieved October 8, 2021, from FactSet Database.
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