The famous Isaac Newton once said, “what goes up must come down.” The first two months of the quarter picked up right where the previous 6 months had left off, with the S&P 500 gaining over 2% each month. Just as the momentum appeared to be unshakeable, September brought a seemingly forgotten reminder: the stock market can go down. Having spent the last 7 consecutive months in the green, the sight of a 5% pullback felt foreign and left some thinking this was the beginning of “the big drop” many of the popular talking heads had been referencing the past 18 months. 

September woes were in full effect this year, as the S&P fell 4.7% for the month, erasing nearly all gains for the quarter. Historically, September has been one of the worst performing months, and seasonal headwinds arrived right on cue to prove the trend right. On the last day of the quarter, the S&P squeaked back in the positive, finishing up .6% for the quarter while the Dow finished down 1.9% and the NASDAQ down .2%. However, it is worth noting that September was not a bad month for all sectors. While the rest of the market experienced downward pressure, energy stocks soared. In the last ten trading days of the quarter, the S&P was down just over 1% while energy was up over 15%. Rarely have we seen this wide of a divergence between the S&P and the energy sector, but energy now holds a more diminished share of the S&P, so its moves have very little sway on the broader index. 

Overall, the fear of upcoming headwinds loomed large, leading to noticeable outflows in equities as September progressed. China experienced a potential debt crisis as one of its biggest companies, Evergrande, defaulted on its debt. There were worries these debt issues would spread throughout the Chinese economy and lead to a national collapse, which would affect markets globally. Domestically, our own government has been faced with the threat of the debt ceiling crisis. Supply chain backlogs continue to weigh on our near-term economic growth, as evidenced by rising shipping costs and the number of ships anchored offshore waiting for port access. Due to the rising threat of inflation, fiscal policy is thought to be moving from a strong tailwind to a headwind as the Fed begins to get more restrictive. However, we were very quickly reminded why not to hit the panic button. 

Fears were eased as October delivered the best October performance since 2015, rising just under 7% for the month and ending the month at an all-time high. The Dow and NASDAQ followed suit, rising 5.84% and 7.27%, respectively. The market has been aided slightly by positive earnings, as over 90% of S&P companies have reported earnings, with 81% beating estimates by an average of 10.3%. Though not all the above threats have been alleviated, the market continues to be resilient. The expectations are that the Fed will eventually have to move more hawkish, but it is important to understand that though the Fed may be easing off the aid, tapering does not mean tightening. That could and will change in the future, but the near future still shows the Fed to be accommodative, which is bullish in nature for the stock market. Furthermore, through record levels of net worth, continued improvement in the labor market, rising wages, and elevated confidence, the consumer should remain strong and be the primary driver of economic growth moving forward. 

Ultimately, we are grateful that Sir Isaac Newton’s rules of gravity were not meant to represent the stock market. Though the markets fluctuate, they have always presented great long-term opportunity, and we continue to believe this to stay true. While earnings may not be driving the market significantly higher right now, they are likely acting as support for a market that is deemed overextended on a short-term basis. Considering we are on the heels of a 10% rally from 10/4-11/8, it is safe to say the market could be overbought in the short-term. The volatility will never stop, and there are always plenty of volatility inducing threats present, but with a long-term approach to buying high quality companies, opportunity will continue to be abundant. 

John Webb 

Financial Advisor 
Pinnacle Asset Management
Raymond James Financial Services 

Kidd Private Wealth Group