Well, September certainly lived up to its billing as one of the most volatile months of the year!
After a run of seven consecutive positive months, the S&P 500 finally relented and gave back some gains, dropping just under -5% month-over-month. What happened?
When news broke that Evergrande, China’s second-largest real estate development firm, was struggling to pay its debts, the market sold off a bit. Exposure to Western firms appears limited, so Evergrande’s troubles seem mostly restricted to China.
September’s sell-off intensified on the news that Federal Reserve Chairman Jerome Powell wants to slow down the Fed’s direct stimulus program. Following the pandemic-induced recession last year, the Fed stepped in to bolster the US economy by printing money to buy bonds, which pushed down interest rates. Lower interest rates make it easier for consumers and companies to borrow money to buy things. People buying more stuff tends to stimulate growth and shorten the recession.
Objectively, that worked: 2020’s recession was the shortest on record and the economy seems to be on surer footing. As a result, the Fed wants to slow down their stimulus; however, it’s not as simple as turning off the money printer. Tapering the stimulus means balancing the needs of the economy against the risk of runaway inflation – no simple feat. And the market reacted very poorly the last time the Fed sought to reduce its stimulus in 2015, finishing flat for the year. So, this time, they’re trying to do it very carefully.
Hanging over the Fed’s decision is the fight over the Biden Administration’s $3.5 trillion spending proposal, which no doubt contributed to Wall Street’s uneasiness.
It all sounds very dire. In truth, Evergrande’s troubles appear to be contained, the spending fight is more political theatre than anything, and the Fed tapering, while with watching, implies a resilient US economy. In summary, September is a bump on what has otherwise been a strong year.
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