You can observe a lot just by watching.  (Yogi Berra)

One of the lesser-known seasonal anomalies in the stock market is the so-called September Effect, or the tendency of stock markets in both the US and abroad to be weak during the month of September.  For example, since 1928 the S&P 500 has lost 1.0% on average during the ninth month but gained 0.8% on average in the other eleven months.  September 2021 fulfilled its historical destiny with the S&P 500 losing 4.65% to end a seven-month winning streak.  While we’re not convinced that the Effect is anything more than a statistical fluke, some suggest psychology is at work.  September marks the transition from the distracted optimism of summer to the more alert pragmatism that prevails at other times.  If investors are going to be more inclined to observe, the Fourth Quarter will have no shortage of things for them to watch.

Federal Reserve Bank officials recently signaled that they are ready to begin reducing or “tapering” bond purchases.  A big assumption is that inflation will prove to be “transitory” and therefore the pullback need not be hasty.  However, the Fed’s balance sheet has more than doubled to over $8 trillion since the start of the pandemic, leading some to suggest that even a modest removal of support will raise rates, lower growth, and unnerve markets.

Earlier fiscal stimulus measures to mitigate the effects of the pandemic and related economic shutdown amounted to more than 26% of US GDP, close to 40% in Germany and Italy, and as much as 56% in Japan, according to Statista.  Current fiscal legislation may contribute another 20%+ to US GDP, but changes to corporate, personal, and estate taxes may offset some of its effect.

In the capital markets, will bond yields finally rise to account for stronger economic growth, the specter of inflation, and Fed tapering?  And will record high corporate margins stay elevated, or will wage increases, higher taxes, and supply chain disruptions cause them to fall and take stock prices with them?

The list above is long and complicated, and we haven’t even mentioned issues outside the US such as the energy crises in the UK and Europe, the related global commodity price surge, and the regulatory crackdown and real estate troubles in China.  Like Berra’s quote above, the future may appear confusing and convoluted at times.  However, it is through watching and observing that one acquires the knowledge needed to move forward with confidence.

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