October 2021 monthly market insights

Investors concerned about slowing growth, geopolitics, Evergrande

Equity markets experienced notable levels of volatility in September. The month started at record highs but stocks ended up in negative territory, snapping a streak of seven straight months of gains. This was not unexpected as September and October tend to be the most volatile months of the year, on a historical basis. That stated, there were specific sources of concern for investors as well. These included slowing global economic growth—amplified by worries of the U.S. nearing its debt ceiling—the U.S. Federal Reserve’s potential tapering, and ongoing Chinese regulatory restrictions, as well as the more recent possible Evergrande Group default. Supply chain disruptions also worsened, in contrast to earlier expectations that these problems would start to abate during the second half of this year.

Market volatility picks up. Stocks exhibited considerable volatility in September. The month started at record highs but stocks ended up in negative territory, snapping a streak of seven straight months of gains. This is not surprising given that September and October tend to be the most volatile months of the year.

Tapering conditions may be near. U.S. bond yields rose sharply following the U.S. Federal Reserve’s monetary policy meeting in September. Fed Chair Jerome Powell signaled that tapering of bond purchases could start as soon as the central bank’s next meeting in November.

Wall of worries. Many concerns continue to weigh on investors, including slowing global economic growth, rising inflationary pressures, U.S. debt ceiling negotiations, the U.S. Federal Reserve tapering, and the potential Evergrande default. Nevertheless, periods of short-term volatility are not uncommon, particularly around this time of year, and we encourage investors to take a longer-term perspective.

From NEI’s Monthly Market Monitor for October.

% return in C$

Canada: MSCI Canada; U.S.: MSCI USA; International markets: MSCI EAFE; Emerging markets: MSCI Emerging Markets. Source: Morningstar Direct

% return in C$

Canada investment grade: Bloomberg Barclays Canada Aggregate; Global investment grade: Bloomberg Barclays Global Aggregate; U.S. high yield: Bloomberg Barclays U.S. High Yield. Source: Morningstar Direct.

The U.S. Treasury Department is reaching its debt limit of US$28.4 trillion, a maximum amount set by law that the government is authorized to borrow to finance its operations. Treasury Secretary Janet Yellen has indicated that if the debt ceiling is not raised or if another suspension is not granted, the government will likely run out of cash by mid-October. Government payments would cease, which could include a default on government bond payments that are coming due and an inability to meet an approaching ~$20B payments to social security recipients. Addressing the debt ceiling has been complicated by other issues, such as the $3.5T reconciliation spending package and the infrastructure bill.

This debate has major implications for the American economy and the wider market. A possible U.S sovereign default would impact credit markets, triggering a credit ratings downgrade, sending interest rates higher and ultimately stifling the prospects of the U.S. economic recovery while pressuring equity prices. In 2011, when similar political brinkmanship was heated and Treasury debt lost its AAA rating from Standard & Poor’s, 5-year credit default swap spreads spiked 65 basis points on Treasuries. We expect that Congress will likely come to a decision within the final hours before the U.S. runs out of cash, as it is highly unlikely that the government will further add to its existing economic challenges with a debt default.

Source: U.S. Department of Treasury, Bloomberg. As of September 30, 2021.

Aviso Wealth Inc. (“Aviso Wealth”) is the parent company of Credential Qtrade Securities Inc(“CQSI”), Credential Asset Management (“CAM”), Qtrade Asset Management (“QAM”) and Northwest & Ethical Investments L.P. (“NEI”). NEI Investments is a registered trademark of NEI. Any use by CQSI, CAM, QAM or NEI of an Aviso Wealth trade name or trademark is made with the consent and/or license of Aviso Wealth. Aviso Wealth is a wholly-owned subsidiary of Aviso Wealth Limited Partnership, which in turn is owned 50% by Desjardins Financial Holdings Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and the CUMIS Group Limited.

This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. This document is published by CQSI, CAM and QAM and unless indicated otherwise, all views expressed in this document are those of CQSI, CAM and QAM. The views expressed herein are subject to change without notice as markets change over time. Views expressed regarding a particular industry or market sector should not be considered an indication of trading intent of any funds managed by NEI Investments. Forward-looking statements are not guaranteed of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Do not place undue reliance on forward-looking information.

The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. The MSSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to computing, computing or creating any MCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.