September 2021 near-term market assessment

September 2021

US equity markets continued to make new highs in August supported by Fed Chair Jerome Powell reassuring investors that the Fed would take a cautious approach to removing support, the continued backdrop of economic reopening, and strong corporate earnings. Pressure on the “reflation” trade continued to be another key theme in equities, with growth outpacing value within large- and mid-cap equities. However, small cap value stocks continued to outperform small cap growth stocks. The Fed’s emphasis of the belief that inflation will be transitory, growth being pulled forward due to a successful vaccination campaign in the US, and growing fears about the Delta variant of COVID-19 all likely contributed to the continued shift. Questions remain though about whether the rotation will persist given that growth is still above trend, and monetary policy remains supportive. International developed and emerging market equities gained for the month too, although less than the US. Improvements in vaccination programs helped developed markets, while China’s equity market took a pause on its recent slide driven by fears over greater regulation. Yields ticked up slightly in August due to inflation concerns and the likely near-term start of the Federal Reserve’s tapering program.

Overall, we remain cautiously optimistic on US equities with further gains possible due to high cash balances on corporate balance sheets, continued policy support, and a relatively successful vaccination program. These positives are balanced by concerns related to the new Delta variant, the strong recent run, and the potential that companies will not be able to continue to pass along higher material and labor costs to consumers. Given the recent regulations issued by China and its relatively early reopening of the economy last year, we expect weaker results going forward. Recent issues with highly leveraged property developer, Evergrande, also could weigh on results. This could continue to put pressure on emerging market equity returns through a potential decline in Chinese demand for industrial materials from emerging market exporters and through its very large weighting in the emerging market indices. Beyond China, struggles with containing COVID-19 in other countries also dampen our view of emerging markets equities. We view equities in developed markets favorably, given some progress made in containing the virus and the cyclical sector focus. Fixed income has become more attractive, particularly longer-dated issues, as a hedge against the many uncertainties facing the market and economy and as inflation fears moderate. Our view on shorter-term bonds has also improved given higher rate expectations and potentially less inflationary pressures. Although credit spreads remain extremely tight, we remain neutral on high yield bonds, recognizing that issuers generally continue to maintain strong balance sheets in an economic recovery. We also remain neutral on commodities as supply issues ease and given the potential impact on demand if economic conditions related to the virus deteriorate.