Overview: Stock markets around the world traded lower last week as investors considered factors including ongoing concerns about the COVID-19 Delta variant, the Federal Reserve tapering their timeline, potential U.S. tax hikes, and the need to raise or suspend the debt ceiling. In the U.S., the S&P 500 Index ended -0.5% lower last week and is trading sharply lower in the pre-market trade this Monday morning September 20. Investors this week will look for direction from the Fed on its asset purchasing tapering timeline, as the policy committee meets Tuesday and Wednesday. Fed Chair Jerome Powell will hold a press conference at the conclusion of the 2-day meeting to update the markets on policy direction. In the bond markets, interest rates rose modestly, with the 2-year and 10-year Treasuries increasing in yield to 1.14% and 1.37% respectively. Markets continue to monitor inflation, as U.S. consumer prices (CPI) rose 5.3% year-over-year in August, in line with expectations and slightly lower than the previous month’s reading of 5.4%. Of note, used car prices (a big part of recent inflation) fell for the first time in six months. Consumer spending, as measured through retail sales, rebounded in August from -1.1% in July to 0.7% last month. The 0.7% increase beat expectations of the consensus of a -0.8% decline and was up a robust 2.5% excluding building materials, gas, and autos.
Stock valuation commentary: (from JP Morgan) Since the beginning of May, 59% of S&P 500 constituents have experienced a peak-to-trough decline of at least 10%. However, over the same time period, the S&P 500 has spent 88% of days without moving up or down by more than 1%. So with things calm on the surface but a number of cross-currents racing below, what could cause an index correction? To start, the lack of an index-level correction has been due to the continued outperformance of the S&P 500’s largest names, many of which reside in the technology sector. S&P 500 price return dispersion at the sector level has not been evenly distributed. On the one hand, current prices in the energy, materials, and industrials sectors are flat/down relative to the end of April, whereas prices in the technology, real estate, communication services, and health care sectors are hovering just below their local peaks. With the exception of real estate, the sectors that have demonstrated this resiliency tend to have a “growthier” tilt, suggesting that an upward move in long-term rates poses the biggest threat to these parts of the market. With August’s inflation report marking the 4th straight month of y/y headline CPI of +5% and the Federal Reserve likely to announce tapering plans in its November meeting, we continue to expect rates will increase into year-end; this could pressure growth stock valuations, and potentially lead to more meaningful pullback at the index level.
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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