In this week’s narrative, we discuss the recent pullback within the equity market. We also review the two best-performing sectors within the S&P 500 for the first nine months of the year, along with the current standoff related to raising the debt ceiling. We then discuss the huge number of unfilled jobs within this U.S., along with the actual employment gains for both August and September. Finally, we briefly discuss some of the recent events in China and how Emerging Markets equities have lagged other geographies in 2021.
Halfway to a Correction – In early June, we discussed the historical frequency of corrections (10% declines) within the market since the late 1920s. At that time, we had gone over 440 days since our last such pull back. From a solely historical perspective, we noted that since the 1950s those corrections have tended to happen on average once every 17 months. We are now to the long side of the average, with the last 10% correction occurring over 18 months ago. While the clock is still running on that metric, last week we did get half of the way to that point, when the S&P 500 registered a 5% decline from its all-time closing high on September 2. The market rebounded a bit over the next few days and finished trading last Wednesday 3.7% below its all-time closing high. Given the current economic strength and still accommodative Fed, we believe any continued weakness within the market is likely to be limited to a normal correction. Our lone caveat to that assertion, which we deem unlikely, would be some exogenous event (including a vaccine-resistant strain of COVID-19).
Energy and Financials – While technology stocks are often the focus for many investors and market commentators, over the first nine months of the year, that market sector has lagged the Index, albeit modestly so. Perhaps surprisingly, the two best-performing sectors of the market are energy and financials. Energy leads the way, up a staggering 43.2%. With the move toward “green” energy espoused by the current administration, this may seem counterintuitive. However, some of those policies have also decreased domestic supply, which has certainly been a tailwind for the commodity. Financials tend to outperform when rates increase, as they have during much of 2021. Nonetheless, the group also generated near-market returns when rates pulled back from March 31 through August 4 (as the 10-year Treasury yield declined from 1.74% to 1.19%). Our positioning continues to overweight value relative to growth, and with these two sectors better represented within the value camp, their performance has proved beneficial to results.
Will Democrats or Republicans Blink First? – With the Infrastructure Bill and the Build Back Better legislation seemingly pushed back until at least later this month, the focus in Washington turned to a timelier issue. The nation is fast approaching its debt ceiling, with Treasury Secretary Janet Yellen pegging October 18 as the day the United States will no longer have authorized funds available to pay its bills. There is no doubt that the debt limit will ultimately be increased, and the U.S. will move past this issue. That said, there is likely to be a good amount of drama and theatrics between the present and that point in time. While a short-term, bipartisan fix was being negotiated in the Senate late last week, it would only push this off to December. In addressing the debt limit for the longer-term, Democrats will push Republicans to agree to the increase, and Republicans will advocate for Democrats to address this via Reconciliation, which would require, and likely receive, no Republican votes. Of note, the rules of budget reconciliation would also require Democrats to specify a new dollar limit for the national debt. Like many things in Washington, this process with be messy, but is highly unlikely to have any lasting impact on financial markets, regardless of which party blinks first.
|Russell 1000 Value||1.2||1.5||22.7||16.79||11.35||1.77|
|Russell 1000 Growth||0.0||(3.5)||23.4||30.79||23.83||0.64|
|MSCI EM (Emerging Markets)||3.7||2.9||(4.0)||11.03||10.03||2.38*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||(0.3)||(1.5)||(1.9)||4.21||3.16||1.98|
|Bloomberg Barclays US High Yield – Corporate||(0.2)||(0.6)||4.6||7.50||5.93||4.45|
|Bloomberg Barclays Municipal Bond||(0.7)||(0.9)||0.7||4.30||3.74||1.31|
|Bloomberg Barclays Global Aggregate x US (Country)||0.3||(0.3)||(5.8)||2.44||2.94||1.15|
|Crude Oil WTI (NYM $/bbl) Continuous||6.2||9.9||55.3||17.0||9.3||82.6|
|Natural Gas (NYM $/mmbtu) Continuous||16.6||21.6||59.8||13.7||5.1||4.3|
|Gold NYMEX Near Term ($/ozt)||0.1||(0.0)||(0.9)||12.4||8.8||1,827.2|
|Copper Cash Official LME ($/mt)||(1.2)||(0.2)||21.1||17.7||10.9||9,665.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.13||1.24||1.22||1.15||1.07||1.14|
|Japanese Yen per U.S. Dollar||115.79||115.16||104.20||108.41||114.03||114.85|
|U.S. Dollar per British Pounds||1.36||1.35||1.36||1.28||1.22||1.37|
September Jobs Report Arrives
The chart above details the number of open jobs in the U.S. since this data series was started in December 2000. The figure currently stands at an all-time high, with roughly 11 million open positions, an amount which is roughly 2x where it has stood over most of the last two decades.
This dynamic should seemingly translate to outsized monthly gains within the jobs market, but that was certainly not the case in August. For that month, consensus estimates called for nonfarm payrolls to advance by 750,000, but the actual figure showed a far more modest increase of 235,000.
A good amount of the August shortfall was found within the leisure and hospitality sector, where there were no new jobs added, after averaging roughly 350,000 per month over the prior six months.
Still, the shortfall to consensus exceeded that amount, and with jobs aplenty, it has been hard to ascertain exactly why open positions have not been filled more quickly. However, ongoing concerns related to COVID-19 and enhanced unemployment benefits, which recently expired, likely played a big part in reconciling these items.
Against that backdrop, the jobs report for September arrived last Friday. Consensus estimates called for a more muted gain of 479,000. The actual new hires were announced as 194,000, a step down from even the prior month’s lackluster figure. On a modestly positive note, the job gains for August were revised higher, to 366,000, from the originally reported 235,000.
Common Prosperity – Not for EM Investors in 2021
The year-to-date return for the iShares MSCI Emerging Markets ETF (ticker EEM) stood at -3.5% through last Wednesday’s close. This compares to the S&P 500, which had advanced 17.5%, and the EAFE Index of developed international equities, which was to the good by 6.8%.
A large portion of the underperformance of Emerging Markets can be traced to its largest constituent, China, where markets have struggled due to changing government edicts and company-specific concerns, most notably Evergrande.
China has embarked on a policy dubbed Common Prosperity, which seeks to more broadly balance the wealth that has accumulated over the years among companies and individuals.
While this may ultimately prove beneficial to the average Chinese citizen, to-date, given the constant state of flux, it has been detrimental to owners of Chinese equities. For any investor, one of the biggest negatives is uncertainty, and that has been ample within China in 2021.
We believe the recent events in China will have long-lasting impacts for Chinese equities, Emerging Markets in general, and U.S. Companies that have historically derived substantial revenues from China’s fast-growing economy.
A discussion of those impacts is clearly beyond the scope of this narrative, but with China being the world’s second-largest economy, the topic has outsized investment implications. Accordingly, we will thoroughly explore this in our upcoming Bryn Mawr Trust Fall Quarterly, which will be dedicated entirely to China. In that piece, we will review how the recent events are likely to impact both Chinese equities and other companies with substantial exposure to the country.