Historically, September has the highest odds of a negative stock market return out of all the months of the year. And as if on cue, this year it is no different. The S&P 5001 drifted lower at a fairly slow pace and then accelerated into the last half of the month. It “only” had a drawdown (from prior high to new low) of about 4.01% (FastTrack Data). And while that is one of the “larger” pullbacks we’ve had in the last year, it is still shallower than what we’d think of as “typical” for this volatile month.
Our Mid-Term Cycle signal is having similar struggles as we close out the month. While spending much of the month in negative territory (telling us to keep our market exposure limited for much of the market’s drift lower), it did go positive briefly before the market got hit again. The move down seemingly came out of nowhere. And a day later, we were back to playing it safe. We do expect volatility to continue for at least another week and hope the market can decide which direction it wants to finish out the year.
As of Wednesday night (Sept 29th 2021), our Shadowridge Dashboard showed Positive to Negative sectors as 2 to 9. Part of what helped with the glimpse of potential positive conviction was the move from 0 positive sectors into first Energy, and then Financials. That shift seems to have stalled for now. It is possible we will continue to see a choppy market unless we see more positive participation across more sectors of the market.
Much of the recent market movement has been driven by government or Federal Reserve news above all else. The Fed’s statement about “tapering” bond buying is not as positive as the news is making it out to be, in our opinion. And just yesterday, Fed Chairman Powell referred to the Inflation problem as “frustrating.” We’re not sure the Fed is as in control of inflation as they would like to think they are. In addition, the government’s battle to raise the debt ceiling could cause some unnecessary drama in the near future. Once we get past that, we can focus more on valuations (which also aren’t great…but that’s a different story for another day).
This month’s chart is from our data “dashboard,” often referenced in our monthly webinar version of this Market Commentary. We interpret this as money flow coming into and out of the stock market, and it drives our investment decisions in the Enhanced Index models. The signal went negative around September 10th suggesting to play it safe for much of the month. Then briefly on Sept 27th (see that little bump above “0” on the right?), it just turned just bullish enough to trigger us to start moving back into the market. However, this was quickly reversed the next day when the market moved down again. The jitters that day were blamed on interest rates rising. (I’m not sure the move was justified by that specific piece of news, but that’s what the media was committing to.) We’ll see how this continues to play out…
Bonds – the Aggregate Bond Index AGG is at -1.67% YTD in 2021. This traditional diversifier has been a drag this year, along with US Treasuries across the board. They usually offer a way to spread market risk, but recently, they have provided little benefit. High Yield bonds remain strong, being up around 3.07% through September 29th of 2021 (FastTrack Data). And since High Yield bonds also tend to do well comparatively during rising-rate environments, that is where we’ll continue to be focused.
Ryan, Will, and Christine (your Portfolio Managers) have been hard at work! After a few months of reviewing, poking, and prodding at the Hepburn Capital “HCM Flexible Income” and the Shadowridge “SDW Income” models, we came to the conclusion to create a “Greatest Hits” version of both. We will be combining the best of each strategy into one “SDW Income” model over the next month. Great care was taken to keep the focus on Capital Preservation while being opportunistic in what parts of the bond market are selected. These strategies have been a bright spot for us this year and we think they will continue to shine together.
In a similar vein, we will be combining the “HCM Municipal” strategy with the “SDW High Yield Muni” model, as well. Here we’ll be combining the risk management of the Hepburn Capital model with the higher-yielding selection process of the Shadowridge model. Again, this will be another “Greatest Hits” blend of thinking – pulling from each of our strengths.
Both of these strategy updates will also improve tax efficiency in your accounts and create less work for your tax preparer! Yet another reason you can look forward to seeing these changes over the next month.
Don’t forget to catch our monthly webinar, where I dive deeper into what I mention in the newsletter commentary. For me, nothing tells the story as much as visuals, so I really enjoy the webinar for digging into what we’re doing with investment decisions. After me, Phil and Laura will be presenting timely topics to help you face life’s financial challenges and opportunities. We hope you can join us – Thursday, October 14th at noon Central time.
You can sign up for the webinar here. We look forward to seeing you there!
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.