What Caused The Market To Sell Off In September?

What Caused The Market To Sell Off In September?

The stock market experienced a fairly significant drop in the month of September.  In September, the S&P 500 Index dropped 4.8% which represents the sharpest monthly decline since March 2020.   I wanted to take some time today to evaluate:

·         What caused the market drop?

·         Do we think this sell off is going to continue?

·         Have the recent market events caused us to change our investment strategy?

September Is Historically A Bad Month

Looking back at history, September is historically the worse performing month for the stock market.  Since 1928, the S&P 500 Index has averaged a 1% loss in September (WTOP News).  Most investors have probably forgotten that in September 2020, the market experienced a 10% correction, but rallied significantly in the 4th quarter.  

The good news is the 4th quarter is historically the strongest quarter for the S&P 500.  Since 1945, the stock market has averaged a 3.8% return in the final three months of the year (S&P Global).

The earned income penalty ONLY applies to taxpayers that turn on their Social Security prior to their normal retirement age.  Once you have reached your normal retirement age, this penalty does not apply.

Delta Variant

The emergence of the Delta Variant slowed economic activity in September. People cancelled travel plans, some individuals avoided restaurants and public events, employees were out sick or quarantined, and it delayed some companies from returning 100% to an office setting.  However, we view this as a temporary risk as vaccination rates continue to increase, booster shots are distributed, and the death rates associated with the virus continue to stay at well below 2020 levels. 

China Real Estate Risk

Unexpected risks surfaced in the Chinese real estate market during September.  China's second largest property developer Evergrande Group had accumulated $300 billion in debt and was beginning to miss payments on its outstanding bonds.  This spread fears that a default could cause issues other places around the globe.  Those risks subsided as the month progressed and the company began to liquidate assets to meet its debt payments.

Rising Inflation

In September we received the CPI index report for August that showed a 5.3% increase in year over year inflation which was consistent with the higher inflation trend that we had seen earlier in the year.   In our opinion, inflation has persisted at these higher levels due to:

·         Big increase in the money supply

·         Shortage of supply of good and services

·         Rising wages as companies try to bring employees back into the workforce

The risk here is if the rate of inflation continues to increase then the Fed may be forced to respond by raising interest rates which could slow down the economy.   While we acknowledge this as a risk, the Fed does not seem to be in a hurry to raise rates and recently announced plans to pare back their bond purchases before they begin raising the Fed Funds Rate.  Fed Chairman Powell has called the recent inflation trend “transitory” due to a bottleneck in the supply chain as company rush to produce more computer chips, construction materials, and fill labor shortages to meet consumer demand.  Once people return to work and the supply chain gets back on line, the higher levels of inflation that we are seeing could subside.

Rising Rates Hit Tech Stocks

Interest rates rose throughout the month of September which caused mortgage rates to move higher, but more recently there has been an inverse relationship between interest rates and tech stocks.  As interest rates rise, tech stocks tend to fall.  We attribute this largely to the higher valuations that these tech stocks trade at.  As interest rates rise, it becomes more difficult to justify the multiples that these tech stocks are trading at. It is also important to acknowledge that these tech companies have become so large that the tech sector now represents about 30% of the S&P 500 Index (JP Morgan Guide to the Markets).

Risk of a Government Shutdown

Toward the end of the month, the news headlines were filled with the risk of the government shutdown which has been a reoccurring issue for the U.S. government for the past 20 years.  This was nothing new, but it just added more uncertainty to the pile of negative headlines that plagued the markets in September.  It was announced on September 30th that Congress had approved a temporary funding bill to extend the deadline to December 3rd.

Expectation Going Forward

Even though the Stock Market faced a pile of bad news in September, our internal investment thesis at our firm has not changed.  Our expectation is that:

·         The economy will continue to gain strength in coming quarters

·         There is a tremendous amount of liquidity still in the system from the stimulus packages that has yet to be spent

·         People will begin to return to work to produce more goods and services

·         Those additional goods and services will then ease the current supply chain bottleneck

·         Interest rates will move higher but they still remain at historically low levels

·         The risk of the delta variant will diminish increasing the demand for travel

We will continue to monitor the economy, financial markets, and will release more articles in the future as the economic conditions continue to evolve in the coming months.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Paying Tax On Inheritance?

Not all assets are treated the same tax wise when you inherit them.  It’s important to know what the tax rules are and the distribution options that are available to you as a beneficiary of an estate. In this video we will cover the tax treatment on inheriting a:

·         House

·         Retirements Accounts

·         Stock & Mutual Funds

·         Life Insurance

·         Annuities

·         Trust Assets

We will also cover the:

·         Distribution options available to spouse and non-spouse beneficiaries of retirement accounts

·         Federal Estate Tax Limits

·         Biden’s Proposed Changes To The Estate Tax Rules

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The Impact of Inflation on Stocks, Bonds, and Cash

The inflation fears are rising in the market and we are releasing this video to help you to better understand how inflation works and the impact that is has on stock, bonds, and cash.  In this video we will go over:

·         How inflation works

·         Recent inflation trends that are spooking the markets

·         Do we have to worry about hyperinflation like in the 80’s

·         How stocks perform in inflationary environments

·         The risk to bonds in inflationary environments

·         How cash melts due to inflation

·         The Feds reaction to inflation

·         Inflation conspiracy theories that are building momentum

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

The Top 4 Things That You Need To Know About The Trade War With China

The trade negotiations between the U.S. and China have been the center of the stock market’s attention for the past 6 months. One day it seems like they are close to a deal and then the next day both countries are launching new tariffs against each other.  While many investors in the U.S. understand the trade wars from the vantage point of the United States, very few people understand China’s side of the equation.   The more we learn about China’s motivation and viewpoint, the more we realize that this could be a very long, ugly, and drawn out battle. The main risk is if this battle is not resolved soon it could lead to a recession in the U.S. sooner than expected. 

1:  China Is Tired Of Being On The Losing End Of Trade Deals

When you look back through history, going as far back as the mid 1800’s, China has been on the losing end of many of it’s trade deals.  To summarize that history, when you are a very poor country, and your economy is based primarily on exporting goods to other countries, those countries that are buying your goods have a lot of power over you.  If you don’t agree to their terms, they stop buying from you, and your economy collapses.  China’s history is filled with trade deals where terms were dictated to them so they feel like they have been taken advantage of.

Now that China has the fastest growing middle class in the world, they are less reliant on trade to fuel their economy.   Also, the size of China’s economy is growing extremely fast. The size of a country’s economy is measured by their GDP (Gross Domestic Product). A country’s annual GDP is the dollar value of all the goods and services that are produced in that country in a single year.   It’s fascinating to see how quickly China has grown over the past 20 years compared to the U.S.

The numbers speak for themselves.  In 2000, the size of China’s economy was only 9% of the U.S. economy.  In only a 17-year period, China’s economy is now 67% the size of the U.S. economy and based on current GDP data from both countries, they are still growing at a pace that is about three times faster than the U.S. economy.

China seems to be making a statement to the world in these negotiations that terms will no longer be dictated to them.  China now has the economic firepower to negotiate terms as an equal which could drag out the trade negotiations longer than investors expect.

2: Tariff Impact On China vs U.S.

In May, the U.S. raised the tariffs on select goods imported from China from 10% to 25%.  China then retaliated by raising their tariffs on US imports from 10% to 25%.  We have heard in the news that these tariffs hurt China more than they hurt the U.S.    In the short term this would seem to be true. The U.S. imports about $500 Billion in goods from China compared to the $100 Billion in goods that China imports from the U.S.

But the next question is, “if it hurts China more, does it hurt them a lot or a little from the standpoint of their overall economy?”   The answer; not as much as you would think.  The chart below shows China’s total exports as a percentage of their GDP.

Back in 2007, exports contributed to over 35% of China’s total GDP.  As of 2018, exports represent less than 20% of China’s annual GDP.  Of their total exports about 18% go to the U.S.  So if you do the math, exports to the U.S. equal about 3.6% of China’s total annual GDP.   Personally, I was surprised how low that number was.   Based on what we have been hearing about the negotiations and how the U.S. is in such a strong position to negotiate, I would have expected the export number to be much larger, but it’s less than 4% of their total GDP.  This again may lead investors to conclude that the volatility we are seeing in the markets surrounding the trade negotiations may be an unwelcomed guest that is here to stay for longer than expected.

3: The Impact of Tariffs On The US Economy

While the U.S. is using tariffs as a negotiating tool,  it may be the U.S. consumer that ends up paying the price. That washing machine that was $500 in April may end up costing $625 in June.  Companies that are importing goods from China and selling them to the U.S. consumer will have to decide whether to absorb the cost of the tariffs which would decrease their net profits or pass those costs onto the consumer in the form of higher prices.

The other problem that you can see in this example is tariffs are inflationary.  Meaning they push prices higher. The Fed announced at their last meeting that they were content with keeping interest rates where they are for the remainder of 2019 given the slowing economic growth rate and tame inflation.  But if tariffs spark inflation, they may have to reverse course and raise rates unexpectedly to keep the inflation rate under control which would be bad news for the stock market.

4: Global uncertainty

Companies typically do not invest or make plans for growth if the global economy is filled with uncertainty, they pause and wait for the smoke to clear.   The longer the trade uncertainty between the U.S. and China persists, the more downward pressure there will be on global economic growth around the world. 

Summary

It’s unclear how this situation between the U.S. and China will play out and how long it will be before there is a resolution. In times of uncertainty, investors need to be very aware of how these trends could potentially impact their investment portfolio and it may be the appropriate time to begin building some defensive positions if you have not done so already. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Market Alert - UK Votes To Exit EU

We have been working through the night to monitor the UK exit vote in Europe and wanted to get this information out as soon as possible.Today is a historic day.  Last night the UK voted whether or not to leave the European Union.  The polls closed at 10 p.m. last night, the votes were counted, and at 2 a.m. this morning it was announced that the UK had voted 51.9% in favor of leaving the EU.  To put this situation in context, this would be similar to New York deciding to leave the United States to form its own country.

This was not the expected outcome and is largely an unprecedented event. Going into the vote yesterday most polls expected the UK “stay” vote to prevail given the economic headwinds that the UK would  face if the “leave” vote were to win.  David Cameron, the prime minister of the UK, was largely in favor of the UK staying in the EU.  Today at 3:30 a.m., Cameron announced that he would step down as the prime minister since new leadership, that is in favor of the exit, should be in place to negotiate Britain’s exit from the EU.

The European Union (EU) is made up of 28 countries.  It was originally formed back in 1957 with the goal of preventing wars and strengthening the economic bond between the European countries in its membership.  The UK joined the EU in 1973.  Members of the EU benefit from:

• Freedom of movement between countries

• Freedom of trade for goods, services, and capital

• EU human rights protection

• Euro currency (the UK does not participate in the euro currency)

The Argument To Stay In The EU

Supporters of the UK to stay in the EU believe that the Union is better for the British economy and that concerns about migration and other issues stemming from EU membership are not important enough to outweigh the economic consequences of leaving.  Many economists agree with this claim.  Europe is Britain’s most important export market and its greatest source of foreign direct investment.  An exit of the EU could jeopardize its financial status in the world and the high paying jobs that come with that status.

Those who voted to stay were not necessarily defending the EU but were basically arguing that the UK is stronger with the EU than without.

Argument To Leave The EU

Those in favor of the UK leaving the EU believe that leaving the European Union is necessary for the UK to restore the country’s identity.  Immigration has been one of the largest issue on the agenda with refugees entering the UK under the EU’s permission and “taking jobs” in the place of UK citizens.  Voters in the middle to lower income classes are viewed as more likely to support leaving the Union due to a feeling of being “abandoned by their country” in lieu of the EU policies.

In a way Britain feels like they used to matter to the world as an independent country but over the years have lost their identity now that they are lumped into the EU.  This group of individuals wants to be able to have full control over the country’s economic policy, culture, political system, and judicial system.

What Happens Next?

Now that the UK has voted to leave the EU, it has become clear that there needs to be new leadership in government that supports the UK exit since most of the current leaders, including the prime minister, were in favor of the UK staying in the EU.  We would expect this to happen in a fairly short period of time.

Once the new leadership is in place, the negotiation will begin between the UK and the EU for the exit.  There is not a precedence for this process which leaves a lot of unknowns.  Immediately, nothing changes.  Most likely while the negotiations are taking place over the course of next few months, or more likely years since the UK is still technically an EU member, UK citizens will still be able to move about the Eurozone countries freely, trade will continue, etc.

However, there will most likely be an immediate negative impact on the UK economy given the expectation of the exit.  The British pound (currency) will most likely drop significantly.  The profitability of the multinational companies and banks that are headquartered in the UK will come into question since they will eventually lose the benefits of free trade and capital movements with other EU countries.

Overall we are entering a period of increased uncertainty. Unfortunately, in our view, there is a larger issue at hand.  Yes, the UK exiting the EU is a significant event but the larger issue is for the first time they are laying the ground work that will allow a country to exit the EU.  There are other countries in the EU that may take up similar votes to leave the European Union since a precedence is now being set for the UK to exit.  If the entire EU were to further destabilize it would most likely cause further disruption across the global economy. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.