Mark Lister, 21 September 2021
Last night’s trading session in the US was a very volatile one. The S&P 500 index fell 1.7%, its biggest one-day decline since May, while the tech-heavy Nasdaq index fell even more sharply. However, markets were much weaker than that at one point.
September is traditionally a difficult month for shares, and investor sentiment has waned against a backdrop of slowing economic momentum, persistent inflation pressures and the prospect of central banks starting to reduce the level of monetary support.
The Evergrande Group saga in China is also weighing on markets, as investors ponder the broader impact of any default or worse, collapse. Evergrande is China’s second largest property developer, and it faces a liquidity crisis under a debt burden of US$300bn.
Evergrande’s Hong Kong share price is down 85% in 2021, while one of its listed notes is trading at less than 30% of face value (implying a strong risk of default). Interest payments are due on Thursday for two debt securities, which will be a crucial test of whether the developer is going to be able to meet its obligations to bondholders.
Investors were already getting a little nervous before these developments, with the global economy having lost momentum over the last couple of months. China has experienced one of the sharpest slowdowns, in response to the most widespread virus outbreak since the initial one in early 2020. The world’s second largest economy imposed harsh restrictions in August, which took their toll on the services sector.
The US has also seen economic activity moderate, with the August jobs report a reminder of labour market fragility. Europe has arguably held up better than most, while Japan remains mired in a slump and Australia and New Zealand are grappling with ongoing restrictions.
This all comes at a time when central banks are looking to pare back some of the monetary policy support that has been in place for the past 12-18 months. The Federal Reserve in the US meets this week, and even if an interest rate hike is a long way off, markets will be expecting some guidance on when the monthly bond-buying programme might be reduced.
Central banks in the UK, Europe and Australia have already moved to reduce the equivalent programmes they have in place, while our own Reserve Bank is expected to go a step further and increase the Official Cash Rate next month (for the first time since 2014). A 0.25% hike is fully priced for October 6, while markets see a 0.50% increase as a possibility.
In addition, this is a seasonally difficult time of year for markets, with September having traditionally been the worst month of the year for US shares. Since 1945, the S&P 500 has fallen by 0.5% during September, on average, the only negative month and well below the overall average monthly return over those 76 years of 0.7%. September also has the worst hit rate in terms of producing positive returns, with the S&P 500 rising just 45% of the time during this month, below the overall average of 60%.
While nobody should base an investment strategy around such statistics, these things can play a role when markets are reconsidering the outlook, especially after a very strong run and against the backdrop of other factors such as those listed above. Even those with a positive medium-term view (like ourselves) must that acknowledge it’s been some time since we've seen a sell-off of any magnitude. Many would argue that we were due for a breather.
Our equity portfolios are well-diversified across the world with a focus on large, highquality businesses. We are also tilted to defensive sectors and companies with Private Wealth Research PRIVATE WEALTH RESEARCH / 2 sustainable, growing dividends that should provide a shock absorber during periods of volatility.
Investors positioned in line with our philosophy and approach will be well served by their overall portfolio and should weather any storm much better than most. Our defensive approach gives us confidence our portfolios will hold up admirably, while our fixed income assets will do their job during such periods. Investors have no need to panic, nor should they change tack.
The S&P 500 in the US is 4.0% below the all-time high that was reached earlier this month, and further volatility over the short-term is always a possibility. However, we still see a steady improvement in economic activity over the coming 12 months, as the vaccine rollout continues, and central bank support remains in place (despite it reducing from current levels). Encouragingly, the number of new global cases of COVID-19 has continued to decline, with the seven-day moving average at its lowest level since July, and about 20% lower than last month’s peak.
Last but certainly not least, corporate earnings growth (which is ultimately the driver of share prices over the long-term) has also been very strong in the major regions. The June quarter reporting season for the US market was extremely buoyant, with aggregate S&P 500 earnings growing almost 90% compared with the same quarter a year ago.
Earnings forecasts for the 2021 calendar year are 5.6% higher than three months ago, and 14.3% above estimates from six months ago. It is a similar story in Europe, with forecasts for the Stoxx 600 index in calendar 2021 now pointing to earnings growth of 63%, well ahead of the forecasts for 34% that prevailed in March.
For long-term investors looking to accumulate high quality businesses, any period of weakness or volatility should be welcomed as an opportunity to - cautiously and patiently - put capital to work at more attractive prices.
Mark Lister is Head of Private Wealth Research at Craigs Investment Partners. The information in this article is provided for information only, is intended to be general in nature, and does not take into account your financial situation, objectives, goals, or risk tolerance. Before making any investment decision Craigs Investment Partners recommends you contact an investment adviser.