We saw a continuation of market uncertainty as the SP500 sold off -0.81% this week. We believe that this is caused primarily by (1) the slowdown in economic data, (2) fiscal support diminishing, and (3) discussions of tapering monetary support. To highlight the slowdown in economic data, we saw Industrial Production and Capacity Utilization slow in July, dropping 6.56% to 5.95%. Hurricane Ida primarily brought on this decline as production slowed in states where the storm hit hardest.

Inflation reading by CPI increased but at a much slower pace month over month. As you can see from the chart below, CPI increased 0.3% in August, rising 5.3% over the last 12 months. According to the BLS report, gasoline, household furnishings, operations, food, and shelter rose in August, contributing to the slight increase. However, airline fares, used cars and motor vehicle insurance decline. To unpack the CPI further, we find that the most significant driver of inflation is Services less energy services. These include shelter, transportation, and medical care. The second most important is Commodities.

Adding to this slowdown in prices is the reduced demand from households. You can see this in Friday’s release of the University of Michigan consumer confidence report. Specifically, the University cited a sharp decline in future buying conditions for vehicles, durable goods, and homes, hitting its lowest levels since 1980.

All the above continue to confirm that the peak in economic data may have come in the summer. It has taken a while for the market to reflect this, but we are now seeing the market sell-off after these slower than expected readings. Adding more fuel to the sell-off is diminishing support from Congress and the Federal Reserve. Specifically, unemployment assistance has ceased, the eviction moratorium expired, the infrastructure bill is delayed, and student loan payments will begin in January. Finally, the Federal Reserve is considering tapering its asset purchase program. Currently, the Federal Reserve is purchasing $120 billion in US Treasuries and $40 Billion mortgage-backed securities per month. This provides liquidity to financial markets for additional investments and loans to be created to stimulate the economy. At their most recent meeting, they discussed reducing these asset purchase programs, which would slow the flow of funds into the marketplace.

What does this mean for investors? With the economic data slowing at the same time Congress is removing support and the Fed is reducing asset purchases, the market will likely continue with further weakness. I would expect this to continue until (1) economic growth improves or (2) additional fiscal or monetary support comes. In a year with double digits returns, investors likely see these risks and prefer to take profits as we move to close the year out.

SYMBOLS WEEK RETURN YTD RETURN
SP500 -0.81% 19.13%
NASDAQ -0.41% 17.16%
DJI -0.82% 13.87%
GOLD -2.40% -10.79%
OIL 2.11% 45.26%
EFAF -1.59% 10.63%
BOND -0.12% -0.69%
SECTORS WEEK RETURN YTD RETURN
Energy 0.24% 28.30%
Technology -0.78% 20.62%
Cons Discretionary 0.41% 14.61%
Cons Staples -0.97% 7.79%
Industrials -1.87% 15.85%
Utilities -2.84% 9.41%
Financials -1.14% 28.71%
Real Estate -0.55% 33.68%
Communications -1.58% 24.36%
Health Care 0.47% 18.06%
Materials -3.21% 13.15%
Data Provided by Yahoo Finance as of 9/20/2021

 

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation. All information contained herein is derived from sources deemed to be reliable but cannot be guaranteed. All economic and performance data is historical and not indicative of future results. All views/opinions expressed in this newsletter are solely those of the author and do not reflect the views/opinions held by Advisory Services Network, LLC. The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The Dow Jones Industrial Average (DJIA) is a price-weighted index of 30 actively traded blue chip stocks. Indexes are unmanaged and do not incur management fees, costs or expenses. It is not possible to invest directly in an index.

References

Federal Reserve. (2021). Monetary Policy Report. Retrieved from: The Fed – Monetary Policy: Monetary Policy Report (federalreserve.gov)
University of Michigan. (2021). Consumer Confidence Report. Retrieved from: Surveys of Consumers (umich.edu)

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Grant Collins is a Financial Advisor and co-founded Advanced Investment Management. Grant has been in the finance industry since 2013. Grant is an active member throughout the Owensboro community and currently serves on Brescia’s endowment committee, their alumni association, and teaches economics part time at the University. In his free time, he enjoys spending time with his friends and family, traveling, reading, and playing golf.