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September Stumble — Week of October 4, 2021

Written by Steve Orr, Chief Investment Officer, and Greg Kalb, Investment Advisor

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index -2.19 17.24 31.48 16.27 17.13 4,357.04
Dow Jones Industrial Average -1.36 13.72 25.92 11.24 15.99 34,326.46
Russell 2000 Small Cap -0.24 14.31 50.15 11.64 13.79 2,241.63
NASDAQ Composite -3.19 13.59 31.40 23.09 23.61 14,566.70
MSCI Europe, Australasia & Far East -2.39 8.84 26.36 8.28 9.41 2,281.29
MSCI Emerging Markets -0.91 -1.16 18.52 8.97 9.58 1,253.10
Barclays U.S. Aggregate Bond Index -0.40 -1.55 -0.90 5.38 2.94 2,354.86
Merrill Lynch Intermediate Municipal -0.49 0.49 2.06 4.74 2.94 318.67

As of market close October 1, 2021. Returns in percent.

September Stumble 

Sometimes history does rhyme after all. September lived up to its billing as the worst month for stock performance, at least in this Bull cycle. After five straight quarters of rallies and two more solid months of gains, September put a pothole in the Bull freeway. All the big indices finished the month lower, falling between 3% and 7%. 

D.C. debt drama was a factor in some of the late-month selling. Most of the September stumble is the result of central bank concerns. Raising rates when the economy is hot, and inflation is rising, is old hat. Today we have a different reality. Post-Recovery, the global economy is slowing, and inflation is hot. Interest rates are starting to rise because central banks, the largest buyers of bonds, are set to leave the markets in the coming years, “tapering” their purchases. 

We have talked about economies, here and abroad, slowing toward “normal” levels after last spring’s peak. Early third quarter data suggests the delta variant throttled down global activity below analysts' estimates. Most countries remain in expansion mode, but are just not growing quite as fast as they were. China is the outlier, hampered by energy shortages, supply chain issues and repeated port closings due to the virus. 

Power Squeeze

China is not the only country struggling with rolling blackouts and fuel shortages. Most of northern Europe is facing winter with less than 10 days' supply of natural gas. In most years storage would be filled to about double that level by now. Putin has restricted the flow of natural gas into Europe, enjoying spot prices above $5 per million cubic feet, double last year’s levels. 

Supplies are below 5- and 10-year averages. The pandemic and OPEC’s price war affected production of crude and gas everywhere last year. Texas’ Permian and Eagle Ford fields, prolific gas producers, are undermanned and underinvested, thanks to producers trying to show Wall Street they can earn their cost of capital. Russia faces similar labor and investment challenges. Once demand surged in the recovery, any inventories were quickly drawn down. Texas petrochemical producers also are still catching up from the February winter storm that shut production. 

About that February storm – the warning signs were issued in the summer of 2020. California and Texas both lost peaking power from wind generators when the wind quit blowing. California did not have sufficient fossil fuel backups and had to resort to rolling blackouts. Europe and the U.K. faced the same situation last month. Winds in the North Sea were becalmed; and due to climate change regulations, prices for natural gas and coal-fired electricity were very high. Result: rolling blackouts. 

China is in the same boat: rolling blackouts and rationing of power to manufacturing plants. China’s coal-fired plants are caught between soaring coal prices and regulated prices. As in California, drought has literally drained some of China’s lakes that produce hydroelectric power. China has cut industrial and coal-fired power generation to clear the air in some regions in advance of hosting the winter Olympics. 

Rolling power outages and shuttered manufacturing plants mean lower earnings and fourth quarter GDP. Higher fossil fuel prices are likely here to stay, adding to inflation. We expect OPEC to announce some increased production levels in the coming weeks. They will, however, continue to strike a balance between prices and production. OPEC does not want prices to rise high enough to pull more U.S. shale production out of the ground. 

D.C. Drama

The continuing resolution passed last week funds the government through December 3rd. Next up is whether Congress can pass a bill that raises the debt ceiling. Remember monthly tax receipts are more than sufficient to pay interest on the debt. The very small default concern is over whether Congress can spend more money and direct the Treasury to borrow for the increased spending. At any rate, Congress has a couple of weeks to figure out what other programs they are going to fund – some mix of infrastructure and social spending is on offer. Over the weekend, dollar amounts for some of these spending items began to fall, suggesting groups are looking for compromise. The lower dollar amounts are the result of funding some initiatives for two or three years instead of 10. Look for $2 trillion to cover wi-Fi, charging stations and a range of social programs. 

Home Stretch

The first estimate of third quarter GDP will be released on the 28th. By then we will be two weeks into earnings season. The key to this earnings season is not the excellent results like the last four quarters. Analysts are already expecting great results. This season is all about management’s views on supplies, deliveries, labor and pricing. 


Rising interest rates, D.C. drama, ports opening then closing, and power shortages all cloud the economic outlook. The D.C. negotiations will wind up in the next couple of weeks. Senate leader Schumer has already stated that a debt ceiling bill passed by the House will be taken up by the Senate this week. The delta variant case counts appear to be falling in every country we track. This suggests ports and semiconductor plants may reopen soon. 

This Friday’s job report for September could be all over the map. The end of pandemic supplemental unemployment before the survey week should have sent folks back into the workforce. The delta peak early in the month combined with vaccination requirements may have contributed to rising unemployment claims. Thus, estimates range from gains of 250,000 to 700,000. At least they are all positive. Pencil us in for 420,000, based on claims data. 

One certainty: short-term investor sentiment has taken a nosedive. Sentiment almost always turns very negative before a rally. Bad news tends to yell at markets before it arrives; good news has a way of sneaking up on investors. It is part of a protective bias we humans have, favoring bad news over good. Our market indicators do a good job of not letting trends sneak up on us. Economic growth in the fourth quarter should remain above trend and the current dip provides an opportunity to put funds to work.

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.

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