September monthly market update - The reset month

02 October 2020

September saw markets take a breath from their rapid ascent.  Investors, particularly in the US took stock of where markets had gone over the past 6 months and started to wonder whether they had gone too far. As a result, markets ended the month 3% below where they started, though importantly remain positive for the year.

 

September update table

 

Since March cash has been flushed into the markets from Central Banks and Governments – investors have taken the view that Governments and Reserve Banks will do whatever it takes to support economies and markets. This has allowed share prices to rally far beyond the previous peaks previously reached in February.  Surprisingly, before this correction, the S&P 500 was trading at  12% premium to where it started on 1 January and the NASDAQ was trading at a 35% premium to where it started the year. 

Concerns around overheating in the markets started in late August, starting with the tech stocks, though quickly extended further into the rest of the market when it becomes clear that a third fiscal stimulus package was unlikely to be agreed ahead of the November election. US Federal Reserve Governor Jerome Powell added to the concern in the middle of the month when he clearly stated that further stimulus would be required to stimulate the economy. Luckily, a combination of shaky stock markets and the stern words from Jerome Powell toward the end of the month bought stimulus back onto the table meaning that markets recovered from their lows.  The US market ended down 3.8% for the month, though at one point was down 7%. 

Much of the market rally this year has been driven by the performance of the tech stocks. The tech-heavy NASDAQ fell by 5.1% in the month as investors worried that this might be the start of a new tech bubble.  As we have said in our previous monthly updates, much of the S&P’s meteoric rise is due to the strong performance of the 5 tech giants (Facebook, Apple, Microsoft, Google, Amazon), they have contributed 10.1% to the S&P this year, almost all of the market gains. Those 5 stocks were all down 8% over the course of the month.

European markets were down 1.9% in the month, a lower fall than the US markets. The first half of the month, investors had started to show confidence in a number of European companies and were willing to bank on the recovery, though that positivity was swept aside in the latter part of the month as it became apparent a number of countries would need to slow their reopening. 

The European markets have had a difficult year and are still 14% down for the year. This reflects the different makeup of the European market and economy which is dominated by larger and more cyclical industrial and financial companies.  They do not benefit from a particularly strong tech sector. 

The Japanese market was flat for the month, reflecting investor confidence in the new Prime Minister Yoshihide Suga. He has made it clear he will continue the reforms put in place by Abe in addition to his priorities of digital transformation, telco pricing and regional banking. The Bank of Japan added to the sense of calm by leaving the interest rate and inflation target unchanged.

The NZX was down 1.6% in the month, though this masks two disparate effects.  The two heavyweights A2 Milk and Fisher & Paykel HealthCare both had very negative months. A2 milk which makes up 11.2% of the index was down 17.9% in the month after it reduced its revenue forecast for 2020 and Fisher & Paykel Healthcare (18% of the index) was down 11% in the month.  Without the negative impact of these two stocks, the market would have been up 2%.

We expect to move into a period of heightened volatility over the next few months. Investors will be busy watching the US Election, Brexit negotiations and the speed of a vaccine – a very busy month.

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