September Insights - Market Recap

Jeff McClenning |

The ‘seemingly’ unstoppable bull market

Whether from clients or acquaintances, there has been no shortage of inquiries about the market’s astounding rise.

Key Index Returns




Dow Jones Industrial Average



NASDAQ Composite



S&P 500 Index



Russell 2000 Index



MSCI World ex-USA*



MSCI Emerging Markets*



Bloomberg Barclays US Aggregate Bond Total Return



Source:, Bloomberg, MarketWatch

MTD: returns: July 30, 2021— August 31, 2021

YTD returns: Dec 31, 2020—August 31, 2021

*in US dollars


During August, we saw multiple highs on the broad-based S&P 500 Index, while the tech-heavy NASDAQ Composite topped 15,000 for the first time, according to data provided by Yahoo Finance.  Let’s offer a simple perspective.  On August 18, 2020, the S&P 500 Index closed at a new high of 3,389.78, erasing all the losses incurred during the lockdowns and the Covid recession, according to S&P data from the St. Louis Federal Reserve.  The S&P 500’s prior peak of 3,386.15 occurred on February 19, 2020.  Since eclipsing its former high, the S&P 500 Index has racked up a gain of 33.4%, excluding reinvested dividends, through August 31, 2021.  Put another way, this is an advance of over 30% in just over one year.

Sure, it’s a back-of-the-envelope analysis, but it illustrates one simple idea: the rise in the stock market has been impressive.  That said, let’s get back to the question about the market’s astounding rise.  Most folks don’t understand it.  I’ve heard it in casual conversations, and you have probably heard it, too.  And many seem to expect (or want) a significant pullback.  We get it.  While we are a strong believer that a diversified approach to stocks helps one participate in the long-term upward bias of stocks, we are hesitant to try to time the market or predict where a major index might be in one month, six months, or one year.  However, we’d never discount the possibility of a market pullback over the near term.

Yet, the sharp run-up suggests that stocks are priced for perfection.  When stocks are priced for perfection, we would subscribe to the idea that the market could be vulnerable to a selloff, since any negative surprises can broadside overly optimistic investors.  We have seen it happen before, but it has not happened over the last year.  Declines have been minor and short-lived.


Absorbing unexpected surprises


During August, the rise in Covid cases tied to the Delta variant caused brief volatility, but investors are not on board with the idea that the health crisis will substantially slow the economic recovery and dampen corporate profits.  While some locales are re-implementing mask requirement, we have yet to see the type of restrictions that were in place in 2020 and early 2021.  For now, the market is viewing the vaccines as an inoculation against a rapid slowdown in the economy.  We also saw tragic events play out in Afghanistan.  While the images have been difficult to see and the geopolitical ramifications are unknown, simply put, investors don’t expect the U.S. withdrawal to have an impact on U.S. economic growth over the next six to nine months.

I recognize that’s a harsh way of viewing an unsettling situation that is tragic for many.  But investors, both large and small (who continually and collectively make buy and sell decisions),have a very narrow lens.  That lens is primarily targeted toward future economic growth, profits, Federal Reserve policy and interest rates.  Let’s look at it from a more practical angle.  Will consumers decide to delay a vacation, a big purchase, or simply decide to eat at home rather than dining in a restaurant because of what’s happening in Asia?  It’s highly unlikely.

Are stocks priced for perfection?  In hindsight, all the ingredients for a strong rally have been in place over much of 2021.  A strong economic recovery, much better-than-expected corporate profits, plenty of liquidity and extremely low interest rates.

Let’s review one of the pillars that has been a significant support for shares: low interest rates.  Low interest rates not only help fuel market gains, they help support higher valuations.  While we will spare you a mind-numbing explanation of discounted cash flows, a quick way to explain how low rates influence equity prices is with a simple example.  Low interest rates provide very little competition to stocks.  Low rates encourage investors to look at stocks and other riskier investments rather than settle for safe but paltry returns.  This is especially true when the economy is expanding, corporate profits are soaring and analysts are ramping up future earnings estimates.  In other words, it is not simply low rates, but low rates combined with strong profit growth.

Today, there are few signs that economic growth is set to sharply slow.  Looking ahead, Fed Chief Jerome Powell said [ month in a late August speech that the Fed is openly pondering a cutback in its monthly purchases of bonds; however, he did not provide a firm timetable.  Many analysts expect something more concrete will be forthcoming this year.  But the Fed hasn’t committed, which gives it wiggle room in the event economic growth or job growth unexpectedly slows. But any reduction in bond buys will be well telegraphed.  Furthermore, Powell insisted last month that rate hikes are not on the table right now, and the hurdle to raise interest rates is higher than cutting back on its monthly bond buys.

As we have said before, the pace of economic growth, employment growth, and what happens to inflation will likely have the biggest influence on when and how quickly interest rates might rise.  As we end September, investors will consider whether lofty valuations can hold up to the unwinding of fiscal stimulus and the potential for a reduction in Federal Reserve bond buys later in the year.  Eventually, a market pullback is inevitable.  For now, powerful tailwinds have been supportive.

I trust you’ve found this review to be educational and informative.  Let me emphasize that it is my job to assist you. If you have any questions or would like to discuss any matters, please feel free to give me or any of my team members a call.