September was a bad month for risky assets, so we have seen better bond returns and a flight out of overvalued US equities. The reasons were varied: China Evergrande contagion, COVID cases, and Fed taper issues coupled with a negative energy shock. A close look at the US market shows that the largest declines started after the Fed FOMC meeting which solidified taper action by year-end.
The good news is that COVID cases are falling, the worst Evergrande fears have not manifested, and the real effects of a Fed taper problem is still in the future.
The energy shock, however, is front and center around the world and does not seem to have an immediate solution. Energy supply logistics are hard to adjust quickly. An economic recovery only exacerbated the demand for energy which pushed prices higher. The supply side, unfortunately, cannot be solved even with higher prices in the short-run. Inflation may be less transitory, but energy shocks effect the entire global economy. Any energy shock will have weaker real effects than in the past but that does not change the potential drag on real income and the economy when supply is just not available.
The impact of this price correction is still small. Equity prices are still above their 10-month moving average and September, the worst seasonal month by average monthly return from 1964-present and lowest percentage positive returns, has passed. Nevertheless, fiscal and monetary policy uncertainty not just in the US will make for a difficult environment for risky assets.
postive flows inot stocks and bonds as mesured by ETFs
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