by Tim Carkin, CAIA, CMT
Senior Vice President
In the Pixar classic Finding Nemo, the characters Dory and Marlin were hovering over a trench, the black unknown below, and they had just lost their last hope of finding Marlin’s son, Nemo. Dory grabs Marlin’s fin and starts leading him into the black unknown repeating the words, “Just keep swimming. Just keep swimming.” Tugging him reluctantly along they eventually reach the bottom, and to Marlin’s surprise, they are able to continue their journey. Sometimes the simple truths of kids’ movies are quite profound. Equity markets have been on a tear this year and that can be concerning as we haven’t seen a pullback in months. Sometimes the best thing we can do is to just keep swimming.
The S&P 500 has doubled since the March 2020 bottom. That was the fastest double since 1932, only a remarkable 511 days. Along those lines, there have only been five years with better performance through August since 1950.
Source: FactSet
Historically, the month of September is one of the worst for the markets. As you can see from the chart below, of the “Best Through August” years, half had negative Septembers. But look to the next column, for the remainder of the year — only two maintained negative returns. Softness in September is usually attributed to seasonality and a return from summer vacations. September 2021 has already started off rocky with a weak jobs report and hurricanes ravaging the eastern seaboard.
Source: Strategas
The S&P 500 hasn’t pulled back more than 5% since before the election and we are heading into a weak performance month. The market seems poised to underwhelm in the short term, but what we care most about is fundamentals. Corporate earnings power has been a driving force in the stock market rise. The price-to-earnings ratio, a valuation metric for the market, is at 20.8x right now, down from 22x at the start of the year. With the tremendous rally we have already experienced, we are surprised the market isn’t more expensive. If the market experiences some bumps, we are on good footing and should just keep swimming.
August Jobs Growth Slowing
According to the most recent Labor Department jobs report the U.S. added 235,000 jobs in August, missing the analyst estimate of 750,000 by a wide margin. Obviously, the Delta variant was the variable that played the largest part in the disappointing number, but it is worth noting that when it comes to the jobs report, August is commonly the most revised month. On a positive note, the unemployment rate met estimates by falling to 5.2%, while hourly wages increased 0.6%, a minor upside surprise. The question now is what the Fed will do at the Federal Open Market Committee (FOMC) meeting in a few weeks. Was one disappointing jobs report and a hurricane enough to modify their tapering plans? Despite this hiccup and signs of slowing caused by the Delta variant, the economy has been opening further and there is still more to go. We believe the Fed will not change their tapering decision but may change course on the timing of it.
Takeaways for the Week
Just keep swimming. The market has doubled since March 2020, but it isn’t overvalued
The weak August jobs report might be a hiccup but will not derail the Fed’s taper plans