In the Deadzone
Equity markets dropped toward the end of last week into option expiration Friday as we sit in the “deadzone” of the 3rd quarter. Overnight, the S&P 500 futures are down about 1.5% on China property developer Evergrande worries.
The S&P 500 index fell 0.6% last week to lower its YTD gain to 18.0%. Energy rose 3.3% alongside firmness in natural gas and oil prices, with the latter finishing just below $72. Banks gained 1.1% on the week and are just below the top of the back on a year-to-date basis, up 28%. On the flip side, materials, utilities and industrials all lagged with declines of 1.6% or more.
After rising toward the end of last week, the 10-year Treasury rate is a little lower at 1.33%. Recall most Asian markets are closed for holiday (Japan, Korea), leaving only Europe and USA markets open for selling due to weekend “margin call Monday mornings.”
Outside of the China real estate developer issue, this week’s key event is the Fed’s announcement on Wednesday. Last week’s rebound in retail sales was a surprise to most and the we believe American consumers spending habits will remain more resistant to the latest pandemic wave than expected and stronger into the holidays.
Pre-opening, Pfizer announced positive results for its vaccine trials for 5–11-year old’s which should pave the way for the FDA to approve in mid-4th quarter and help economic activity.
The market is currently in the toughest part of the calendar from a historical perspective. Between 1950 and 2020, August (flat) and September (-0.5%) have recorded the weakest average monthly returns. And, we are still in the “deadzone” of the 3rd quarter with higher trending volatility, with a September dip underway. We currently view these dips as having approximate ranges of 3~6%.
However, our central view remains that the stocks will perform positively on the whole throughout the remainder of the year. Even with the recent choppy market action, the S&P 500 is only down about 2% for the month as of the time of publication. In the larger view, the U.S. is one year into an economic expansion, within a largely constructive picture.
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Interesting Reading:
https://corporate.nordea.com/article/67782/fx-weekly-theres-a-lehman-in-china-every-36-months
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