Global CIO Commentary by Scott Minerd
Market participants remain more focused on the possibility of a reduction in the Fed’s asset purchases than on economic data. Recent comments by Federal Reserve presidents, including the particularly dovish Charles Evans of the Chicago Fed, suggest the U.S. Federal Reserve is likely to announce a tapering of quantitative easing after the Federal Open Market Committee’s September 17-18 meeting. Wednesday’s release of the July FOMC meeting minutes and the Fed’s Jackson Hole Economic Policy Symposium, which begins on Thursday, will provide investors clues about the central bank’s upcoming moves. Importantly, there is a growing consensus that some form of tapering is on the way. Recent economic data is decidedly mixed, and not enough to justify rapid tapering in our opinion. However, since June the Fed has made the markets take their medicine and we see a strengthening in commitment by the Fed to hold to its guidance on the path of the program. Now the internal debate is likely no longer “when” but “how much?” The size of the proposed monthly decrease was originally thought to be $20 billion, but economic headwinds, particularly from the housing sector, make us think that the Fed may settle on a monthly reduction of around half that amount (evenly split between Treasuries and mortgage securities). Regardless of the amount of tapering and its composition, the bottom line for investors is that financial markets will probably be dominated in the coming month by a great deal more of tapering-related noise. This would be a negative for risk asset prices, and is likely to continue to drown out a number of other fundamental economic and policy-related issues including the full impact of the sequester and Washington’s looming budget and debt ceiling debates.
Rising Uncertainty for September
Historically, September is the worst month for U.S. stock market performance. Since 1929, the S&P Composite Index has averaged -1.1 percent for September, making it one of only three months with negative average returns over that time. The worst performing single month over this time period was September 1931, when the S&P composite fell 30 percent. There are several macroeconomic uncertainties facing the United States and the global economy as we head into September. The potential tapering of the U.S. Federal Reserve’s asset purchase program, the budget debate in Washington, and the German election could all increase volatility in global financial markets.
AVERAGE MONTHLY RETURNS OF THE S&P 500 INDEX (1929 – 2012)*
Source: Bloomberg, Guggenheim Investments. Data as of 12/31/2012. *Note: Data reflects average monthly price returns.
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*Assets under management is as of 09.30.2018 and includes leverage of $11.8bn. Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.
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