Conway’s QuickTake: Week of September 27, 2021

U.S. Equity Markets

  • Domestic equity markets closed the week with a small gain, overcoming earlier selloffs. Last Monday’s ~1.7% drop for the S&P 500 Index was the largest daily decline since mid-May.
    • Within the S&P 500 Index, the energy sector was a strong outperformer following higher oil prices. The financials sector also outperformed after rates moved higher. 
    • At the same time, higher interest rates negatively impacted the real estate and utilities sectors.
    • Value stocks led growth stocks while large- and small-cap stocks rose by similar percentages.
    • So far in 2021, large-caps lead small-caps across blend and growth investment styles (not value) while value/growth leadership is more mixed.

International Equity Markets

  • Most non-U.S. equity markets fell last week following concerns over the potential default of one of China’s largest property developers – Evergrande.
    • European equities ended the week with a small gain in USD terms supported by hopes for continued economic growth.
    • Japanese stocks had a volatile week and ended the period with a loss. That said, the Nikkei 225 Average remains just shy of its 30+ year high recorded recently.
    • Chinese equities fell over the week reflecting concerns about the fallout from the potential Evergrande default.
Source: iStock 2021

Credit Markets

  • Throughout the week, yields on U.S. Treasury notes climbed higher as the Fed moved closer to a potential taper.
    • Treasuries ended the week lower after yields rose. The 10-year yield started the week at 1.36% and ended at 1.45%.
    • Corporate investment-grade spreads were modestly (0.03%) tighter over the week.
    • Corporate investment-grade funds recorded $1.5 billion of inflows compared with $3 billion of inflows last week. High yield funds reported $535.5 million of inflows versus $499 million of outflows the prior week.
    • Tax-exempt (muni) yields moved slightly higher (2-4bps) outperforming Treasuries as talk of a fall Fed taper drove rates higher.
    • Municipal new issues for the week were mostly priced ahead of the Federal Open Market Committee (FOMC) meeting with the strongest demand seen inside 10 years.
    • Municipal funds inflows last week were $1.55 billion. This marks the 29th consecutive week of inflows.

U.S. Economic Data/News

  • Fed President Jerome Powell spoke on Wednesday concluding the two-day policy meeting. Key takeaways included the $120 billion taper which could begin “soon’’ with moderation in the pace of bond-buying.
    • A greater number of Fed participants now see higher rates by the end of 2023. The outlook for GDP was revised lower for this year, while the unemployment rate forecast moved higher.
    • Last week’s jobs data underwhelmed after initial jobless claims rose to 351,000, well above of estimates. IHS Manufacturing and Services sector activity also came in below expectations but remained well in expansion territory (above 50).
    • Housing data beat expectations with both new home starts and permits surprising to the upside. New home sales also reached their highest level in several months, although they remain below the peak from last year.

International Economic Data/News

  • The week started on a rough note following reports of the potential default of China’s second largest property developer – Evergrande. Markets feared that the fallout from default could contribute to financial market contagion similar to the U.S. housing market in 2008. 
    • A series of cash injections from China’s central bank over the week helped alleviate concerns about a messy default for the highly indebted property developer. Notably, the company is now in a 30-day grace period after a series of offshore bondholders failed to receive interest payments last Thursday. Many believe that China is aiming for an orderly default of the company which should help contain any potential systemic risk but still send a message about excessive use of corporate leverage.
    • Several European nations are getting close to tapering with Norway leading the pack. The country recently became the first of the G10 nations to tighten its monetary policy by raising its short-term lending rate from 0.00% to 0.25%.
    • Eurozone economic indicators suggest that growth has cooled somewhat recently. IHS Markit Purchasing Managers’ Index (PMI) remained in expansion territory but fell to 56.1 down from a prior reading of 59.0. The pace of growth also slowed in both the manufacturing and services sectors.
    • In Japan, polls suggest that Vaccination Minister Taro Kona is likely to succeed former PM Suga in the upcoming election. Kono is known for his reform-minded views and favors more drastic changes to Japan’s pension system in addition to more stimulative measures.

Looking ahead…

Tuesday, September 28, 2021

  • US Consumer Confidence Index

Thursday, September 30, 2021

  • Initial Jobless Claims (US)
  • US GDP
  • UK GDP

Friday, October 1, 2021

  • ISM Manufacturing
  • US Personal Income figures

Sources: The WSJ, T. Rowe Price Global Markets Weekly Update, GS Weekly Market Monitor

This commentary was written by Craig Amico, CFA®, CIPM®, Associate Director, Noreen Brown, CFA®, Chief Wealth Strategist and Steven Melnick, CFA®, Associate Director at Summit Financial, LLC., an SEC Registered Investment Adviser (“Summit”), headquartered at 4 Campus Drive, Parsippany, NJ 07054, Tel. 973-285-3600. It is provided for your information and guidance and is not intended as specific advice and does not constitute an offer to sell securities. Summit is an investment adviser and offers asset management and financial planning services. Indices are unmanaged and cannot be invested into directly. The periodic returns are represented by the following indices: large cap value by Russell 1000 Value TR Index, large cap blend by Russell 1000 TR Index, large cap growth by Russell 1000 Growth TR Index, mid cap value by Russell Mid Cap Value TR Index, mid cap blend by Russell Mid Cap TR Index, mid cap growth by Russell Mid Cap Growth TR Index, small cap value by Russell 2000 Value TR Index, small cap blend by Russell 2000 TR Index, and small cap growth by Russell 2000 Growth TR Index, international developed by the MSCI EAFE NR USD Index, Emerging Markets by the MSCI EM NR USD Index, U.S. Aggregate Bond by the BBgBarc US Agg Bond TR USD Index, U.S. Municipals by the BBgBarc Municipal TR USD Index, and Corporate High Yield by the BBgBarc US Corporate High Yield TR USD Index. The S&P 500 Index is a market capitalization-weighted Index of 500 widely held stocks often used as a proxy for the stock market. It measures the movement of the largest issues. Standard and Poor’s chooses the member companies for the 500 based on market size, liquidity, and industry group representation. Included are the stocks of eleven different sectors. The Nasdaq Composite Index is a large market capitalization-weighted index of more than 2,500 U.S.-domiciled stocks. The index’s composition is heavily weighted to the information technology sector, with consumer services, health care and financials the next most prominent industries. The Russell 2000 Index measures the performance of the small cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 10% of the total market capitalization of that index. It includes approximately 2,000 of the smallest securities based on a combination of their market cap and current index membership. The Russell 1000 Index measures the performance of the large cap segment of the U.S. equity universe. It is a subset of the Russell 3000 Index representing approximately 90% of the total market capitalization of that index. It includes approximately 1,000 of the largest securities based on a combination of their market cap and current index membership. The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market. It is constructed to provide a comprehensive, unbiased, and stable barometer of the broad market and is completely reconstituted annually to ensure new and growing equities are reflected. The MSCI EAFE Index (Europe, Australasia, Far East) captures large- and mid-cap representation across developed markets countries around the world, excluding the U.S. and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The MSCI Emerging Markets Index captures large- and mid-cap representation across emerging markets countries across the world. The index covers approximately 85% of the free float-adjusted market capitalization in each country. The Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency. The Bloomberg Barclays Municipal Bond Index covers the U.S. dollar-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and pre-refunded bonds. The Bloomberg Barclays U.S. Corporate High-Yield Index measures the U.S. dollar-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Bonds from issuers with an emerging markets country of risk, based on Barclays EM country definition, are excluded. The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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