The answer is YES! We are seeing the market melting down a bit as evidenced by September’s performance.
September performance for the S&P 500 (-4.7%), was the worst month since March 2020. The question now is, will it continue or was that enough? All major asset classes fell in September, except cash. With the S&P 500 up 16% YTD we are facing some serious issues ahead, including serious disruption to the worldwide supply chain, above average inflation for the last 5 months, Fed signals of tapering QE before year end, corporations issuing lower sales and earnings guidance and an explosion in energy prices. I am seeing GDP guidance for the third quarter at 1.8%, which is quite a bit below earlier estimates.
I am not looking for the S&P 500 to eclipse its early September high before year end, but I also do not think we will get any major sell off either. I am looking for sectors and individual stocks to perform at different levels, some selling off more than others. The key will be the 7 mega cap companies that represent 25%+ of the weighting in the S&P 500. This includes Microsoft, Apple, Amazon, Alphabet, Facebook, Tesla and Nvidia. I think these stalwarts will stay strong and support the Index as a whole. As you will notice, we only own a couple of these names. They are all great companies, but some are just too expensive and are too widely owned creating an inverted risk/reward ratio.
The Markets are priced for perfection and some of the premium should get pared back in light of the headwinds and questions around interest rates, inflation, margin compression, supply and delivery issues and how all of this will affect corporate sales, earnings and forecasts for growth of such, in the 4th quarter 2021 and into 2022. I wish the Fed would have started tapering in the spring, when these other issues were not so prevalent. Tapering is necessary but may get blamed for any economic slowdown, which I think would be a mistake. Tapering could create some deflation of hard assets but should not hurt a strong economy. The tech sector, especially software, that will not have supply issues, will do well, but is expensive. The transportation, chemical, industrial, travel, autos and semi-conductor sectors will take longer to improve but are a lot cheaper. Fin tech and certain healthcare names should do well also.
So, I am positive on stocks but will use the 4th quarter to deploy cash smartly and rebalance where situations allow. I am negative on the bond market and will remain in short term notes and invest in private investments where yields and the risk/reward profile is far more favorable. I expect volatility in Q4 and sideways movement for stocks until the uncertainties we have discussed get more clarity. The markets do not like uncertainty.
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