Why investors are in for a wild fall period

AGF CEO urges caution amid pandemic uncertainty, a swayable Fed, and China’s precarious path to growth

Why investors are in for a wild fall period

While September has a decades-old reputation for heralding poor returns in the stock market, investors this year have much more reason to be cautious during the fall.

In a new commentary, Kevin McCreadie, CEO and chief investment officer at AGF Management noted how the S&P 500 has exhibited worse returns in September than in any other month of the year, based on Bloomberg data extending back to 1945. But even absent that, there are other reasons to adopt a cautious stance.

“COVID-19 and the ongoing pandemic, in particular, remains a very big concern, McCreadie said. “As long as the delta variant of the virus continues to proliferate around the world, it can have a huge sway on the economic recovery.”

In several countries including the U.S. and Canada, he noted, school is restarting and parents are returning to workplaces outside their residences. This could be the spark to ignite a new economic growth dynamic, though it could as well be easily snuffed out by a rise in case counts and hospitalizations leading to another round of restrictions.

“One way or the other, the full impact of this latest wave won’t likely be clear until October when data from the next few weeks starts to roll in,” McCreadie said.

And while all investors have been looking to the Fed for direction and guidance, he said the central bank itself is taking cues in large part from the economy. Only a few weeks ago, it was widely expected to start tapering its bond buying program sometime later this year, but investors are attaching a lot less confidence to that timeline following a week U.S. jobs report due in part to the rise of the delta variant.

Expectations of when the Fed will raise interest rates are similarly hard to pin down. McCreadie noted that in the spring, there was a widespread belief that inflation would force the Fed’s hand and rates would rise ahead of schedule. But because of Jerome Powell’s insistence that the thread of inflation contains many transitory strands, coupled with a new surge in COVID cases, the outlook for a quick dove-to-hawk transition has become far less certain.

On the other, other hand, recent wage growth could become a “sticky” driver of inflation, at least compared to commodities like lumber or copper. But as the effects of the expiration of enhanced unemployed benefits in the U.S. set in, that trend could reverse as many employers might once again be able to attract workers without having to “pay up.”

Developments in China could prove to be another fly in the ointment of economic growth. Apart from the Chinese government’s increased scrutiny of its tech companies, McCreadie said officials’ recent expressions of a zero-tolerance attitude for allowing COVID to grip the country again – including partially shutting down the world’s third-busiest port in Ningbo after just one recorded case – represent another pothole to the country’s already precarious path to recovery.

“[B]eyond the recent swoon in China’s equity market, there doesn’t seem to be enough bother about the potential impact all this could have on economic activity elsewhere around the world,” he said. “Remember, China is the second-largest economy behind the U.S. and should growth slow in either of these behemoths – let alone both – it will have a ripple effect across emerging and developed markets.”