Sightline Weekly Market Update: Fiscal Policy & Congressional Gridlock Weigh on Investors’ Minds
The equity markets struggled last week with the largest weekly decline since February and finished off the month Thursday with the worse monthly decline since the beginning of the pandemic. As noted in previous comments, September historically is one of the most volatile months of the year and this September did not disappoint. There is a high probability October may follow the path of September.
The TSX fell 1.49% in the week and ended the month down 2.22%. The S&P 500 lost 2.21% and finished the month down 4.41% in Canadian dollars. The Nasdaq dropped 3.20% in the week and, for the month, tumbled 5.27% in domestic terms. The mid and small cap indices fared better in the week with the S&P 400 Mid-cap index sliding 0.58% and the Russell 2000 just 0.29%. European indices finished the week lower with Germany’s DAX declining 2.42%, France’s CAC 40 Index falling 1.82%, Italy’s FTSE MIB Index losing 1.36% and the UK’s FTSE 100 sliding 1.36%.
The energy sector held up during the week and, for the month, was the only sector in positive territory in the TSX, S&P and MSCI Europe indices. In terms of cap size for September, the MSCI US small-cap fell -2.92% compared to the large-cap and midcaps -4.85% and -4.17% respectively. Rotation from growth to value resulted in US value stocks outpacing growth -3.67% versus -5.75%. When it come to factors, US momentum lost 3.50% compared to quality losing 6.43%, high dividend yield was negative 4.89%, and minimum volatility fell 5.02%.
In the forefront of investor’s minds were the fiscal policy issues confronting the US Congress along with the overhanging cloud of inflation, tapering and the Fed policy response. Congress was able to stall the debate on spending by passing a short-term stopgap solution to the beginning of December. The debt ceiling will be resolved at the last possible second, as in the past, since each side wants to blame the other for adding to the enormous $28 trillion mountain of debt. The infrastructure bill is more problematic. The bipartisan $1 trillion infrastructure bill remains in limbo. The progressives of the democratic party demand passage of the infrastructure bill be linked to the separate $3.5 trillion healthcare, education, climate measures and other social policy priorities bill, which in the eyes of more conservative moderates of the Democratic Party, is a non-starter. Insiders of the Democratic Party are eyeing the mid-term elections next year as a possible defeat of epic proportions unless they can push through the Biden agenda, and still, that may not be enough to prevent control of both houses of Congress slipping through their hands.1
Economic data for the week was benign compared to past weeks. Personal income increased by 0.2% in August and disposable income rose by 0.1%. Inflation as measure by the PCE price index rose by 0.4% with the core PCE price index ex-food and energy increased by 0.3%. Inflation continues to be elevated suggesting inflationary pressures are likely to persist into next year.2 Unemployment claims jumped 11,000 from the previous week on increasing claims data from California. Continuing claims for all programs fell to 5,027,581, a decrease of 6,222,725 from the previous week. The decrease of continuing claims resulted from the ending of extended Federal supplemental benefits. It is anticipated that many of those workers will return to the workforce over the coming months. 3
On Tuesday, Consumer confidence reported by the Conference Board slid to 109.3 from 115.2 on inflation and delta variant worries. The Present Situation index also fell to 143.4 from 148.9 last month. The Expectation Index, which is a short-term outlook for income, labor and business, dropped to 86.6 from 92.8.4 Price increases for food, energy and housing, if they persist, will become a major threat to economic expansion considering expected tax increases to pay for the COVID-19 response.
With headlines jumping from one topic to the next – including the delta variant, inflation, the US Fed policy, Congressional debates on the debt ceiling, infrastructure spending and foreign policy issues to name a few – investors will be challenged. With both sides of the political spectrum in all western countries becoming more entrenched, expect investor sentiment swings creating volatility as we move through October and into 2022.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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