Traditionally the worst-performing month for US equities, September saw most of the third quarter’s gains erased in the most painful month for stocks since the Covid selloff in March 2020. Fear over the government shutdown gridlock, Covid variants, inflation, and supply chain bottlenecks caused investors to move out of riskier assets like equities.
The Federal Reserve also set the stage to announce the beginning of its tapering program in November, with interest rates likely to start rising as early as 2023. A mix of potentially higher short-term interest rates and relatively strong inflation impacted perceptions of growth companies’ short-term prospects and thus their performance last month.
In what has unfortunately become a somewhat regular stand-off, the U.S. government closed the month with looming uncertainty with regards to boththe federal budget and the U.S. debt ceiling. A two-year suspension of the debt ceiling was last passed in August of 2019, but Congressional gridlock prevented another extension last month.
In the meantime, the administration resorted to short-term maneuvers to avert a government shutdown, and late on September 30 a bill was signed that extended government funding through December 3, 2021. The bill, however, did not increase the debt ceiling.
Why does this matter? Should the debt ceiling not be raised, we could face the specter of a U.S. default. This is of course very unlikely to happen, but in the meantime a focus on managing repayments for outstanding debt are an unwelcome distraction for the Treasury, and it introduces extra uncertainty into a recovery process that is otherwise going relatively well.
This issue also ties into a larger legislative negotiation—namely, President Biden’s flagship $1.2 trillion infrastructure bill and a $3.5 trillion social investment package. We will of course see how those negotiations progress, but the relatively high priority issue of the debt ceiling seems to be raising the stakes.
It’s too soon to have forgotten about 2020 toilet paper shortages from supermarket shelves and skyrocketing lumber prices spilling over into housing prices. This year, both new and used car prices rose higher on the back of chip shortages, an issue that cascaded into personal electronics. We spoke earlier this year about escalating home prices nationwide.
At first, the view from the Fed was that both the inflation spike and supply chain bottlenecks were a “transitory” issue. However, the definition of transitory may be changing somewhat. Fed Chair Jerome Powell acknowledged in late September that factory shutdowns and supply chain bottlenecks are likely to persist into next year.
The pipeline that brings $1 trillion of goods like clothing, electronics, and toys from Asia to the United States is acutely clogged, with delays on shipping routes causing further bottlenecks. It appears that things will get worse before they get better. For an eye-opening example, consider that on September 1, there were 40 container ships from Evergreen, Hyundai, and NYK Line waiting off the coast of California. Three weeks later, it was 73 ships.
U.S. companies appear to be reworking their supply chains and investing in new capital expenditures to help reign in the problem. In the short term, however, inflation numbers are running quite hot, with August personal consumption expenditures (PCE) coming in at the highest reading in 30 years.
Though we’re still seeing stubbornly high energy prices and short-term inflation, the business recovery continues. Policy support is high, corporate earnings remain strong, and the Fed forecasts that the economy will grow 5.9% in 2021. In other words, while we might be entering a less jubilant phase of the recovery, where some of the lingering issues of the pandemic are sorted out and the “transient” effects start to wind down, the evidence suggests that we are still recovering.
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