Friday's Market Minute: Investors are Glad to See September End

September was a challenge as investors confronted the reality that some of the main drivers of a long-running rally stalled out. The S&P 500 index ended the quarter up just 0.2%, a far cry from the standard we have become accustomed to over the past year and a half. The Federal Reserve signaled after its most recent policy meeting last week that the economy was almost strong enough for it to begin scaling back its bond-buying program and indicated rates may rise in late 2022.

A growing list of concerns manifested into the end of the quarter, creating a cautious shift in investor sentiment and the first meaningful market pullback so far this year. There’s an enormous amount of uncertainty in the markets now, yet pockets of appetite exist to buy the dip despite risks that are becoming impossible to ignore. Central banks are doing their best to reassure us that inflation remains just a temporary supply-side issue, but there also seems to be less conviction in their views. Even the Fed’s expectations of U.S. inflation have been rising. In the statement following last week’s FOMC meeting, Fed officials saw core inflation at 3.7% in 2021, up from its estimate of 3% in June.

Jay Powell, in remarks to Congress this week, said that inflation could stay higher for longer, particularly if supply chain issues persist. The move up in yields over the past couple of weeks has been particularly notable, raising interesting questions for markets about policies and the resilience of the global economy.

Pandemic stimulus measures are being withdrawn at a time of real uncertainty for the markets, whether that be around COVID, the energy shortage in China and Europe, Evergrande, the debt ceiling impasse, or the looming event of Fed balance sheet tapering, which has had the effect of anchoring long-term borrowing costs. Altogether, the economy remains fundamentally strong, but investors are grappling with how to balance the risk and reward of exposure to growth-centric equities with rising discount rates that could act as a short to medium-term headwind.

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