Market Pulse - 20 September 2021

Volatility has increased in markets, however we do not believe this should be reason for concern or warrant selling US equities.

We believe this correction will prove to be a buying opportunity and investors should be thinking about putting idle cash to work throughout the correction for a few reasons.

• It has been a year since the S&P 500’s last 10% correction. (Sept 2020, S&P 500 fell 10.1% from 9/2/20 to 9/24/20)
• This year, the S&P 500 has had multiple 3% pullbacks and one 6% pullback (Feb 2021).
• September is typically a volatile month for stocks, only to be followed historically by rebounds in October, November, and December. (Past performance is not indicative of future performance).
• To illustrate the volatile nature of financial markets, according to Schwab, intra-year stock market declines over the 20-year period from 2000–2019. As you can see in the chart below, a decline of at least 10% occurred in 11 out of 20 years, or 55% of the time, with an average pullback of 15%. And in two additional years, the decline was just short of 10%. Despite these pullbacks, however, stocks rose in most years, with positive returns in all but five years and an average gain of approximately 6%.

Of course, there are underlying reasons why the market is in the midst of a possible correction that are important and should be paid close attention to.

• Evergrande, the second largest Chinese property developer, has warned of a possible default on their $300 billion of debt, which could spark a credit crisis in China with potential global implications.
• Concerns that rising inflation will not be as transitory as the Fed is leading on.
• Global supply chain slowdowns could put a strain on demand, resulting in a slower economic recovery than anticipated.
• The Federal Reserve has announced that they will begin tapering their asset buying program by the end of this year to combat rising inflation. The Fed's current program purchases $120 billion of assets every month. Details have not yet been given regarding what the taper will look like, however we can use the last "taper tantrum" as a guide to look for opportunities in the market. It is important to note that the Fed will not be going from $120 billion of purchases a month to $0 overnight. We will continue to see a period of easy monetary policy and stimulus from the Fed, which we believe will be bullish for US equity markets.
  

Corrections can cause a lot of anxiety. However, it's important to recognize that financial markets have historically seen a significant pullback at some point during most years while still delivering positive returns over the full year. For example, in 2018, the S&P 500 saw a market correction of more than 10% in the first quarter of the year and again in the fourth quarter, followed by a rebound of more than 13% in the first quarter of 2019.

These market corrections are more common than you might think. Over the past five years, there has been five corrections including the most recent one. These occasional pullbacks have historically been followed by rebounds, according to the Schwab Center for Financial Research. Since 1974, the S&P 500 has risen an average of more than 8% one month after a market correction bottom and more than 24% one year later. Investing in a diversified portfolio and maintaining the discipline to stick with your longer-term plan through these periods of volatility are among the keys to investment success.‍

Outlook

We believe that the S&P 500 will fall to around 4,250 before this pullback bottoms. That being said, investors should stay disciplined to their long-term investing goals and not react to market corrections. It is okay to put cash to work, however deviating from long-term financial plans is not recommended at this stage.

We believe investors should focus on large-cap companies with quality earnings, mega-cap technology companies, and industrial companies to weather the storm of rising inflation, interest rates, and a potential slowdown in the global economy.

As always, if you have any questions, or would like to discuss your portfolio/current situation, please feel free to set up a call by clicking here.