OCTOBER 2021

Volatility Picks Up

• Global stocks lost 4.1% in September, the worst decline of the Covid recovery.
• Losses were widespread with both emerging and developed markets falling ~4.0%.
• In the US, growth stocks (-5.7%; 14.6% YTD) and the NASDAQ suffered the most (-5.3%; 12.7% YTD) followed by the S&P 500 (-4.7%; 15.9% YTD) and Russell 2000 (-2.9%; 12.4% YTD).
• Led by a 9.5% gain in oil to the highest in ~seven-years, commodities and energy stocks outperformed while all other sectors were lower.
• Major bond yields increased as central bank communication turned more hawkish and inflationary pressure picked up.
• The 10-year US Treasury and German bund gained 18 bp, the most since March and February, respectively.
• Despite heightened risk aversion, US high yield credit spreads were flat and investment grade even declined.
• However, as China growth and credit contagion concerns escalated, spreads for emerging market USD denominated debt gained 21 bp or the second most since March 2020.
• Risk-off sentiment and higher rate differentials drove the USD 1.7% higher bringing the YTD return to 4.8%.
• Signs of supply-side bottlenecks leading to production difficulties, resource shortages, and higher input costs increased.
• Going forward, what we are watching is whether supply chain bottlenecks ease, hiring conditions in labor markets improve, excess savings built up during lockdowns are spent by consumers, and Chinese policy stabilizes growth momentum and credit concerns in the property sector.
• Given the strength of the global economic recovery that was quicker than most forecasts, we remain positive but the outlook has become more uncertain and higher volatility should be expected.
• The varying stages of the economic recovery and vaccine rollout globally and subsequent inflation and policy risk suggests a more active and global approach to investing.