How Long Will the Current Market Volatility Continue?

(Please enjoy this updated version of my weekly commentary published September 29, 2021 from the POWR Value newsletter).

As I discussed in last week's commentary, the markets got off to a bad start last week, but fortunately, stocks were able to reverse course later in the week to finish with gains. Stocks got a boost from Fed Chair Jerome Powell, who confirmed the tapering of asset purchases would begin soon, but the Fed is still committed to ensuring the economy is on solid ground.

Gains were extended into Thursday due to the continued positive sentiment regarding the economy. Slight gains continued on Friday as stocks ended a volatile session on a high note. It appeared investors were looking past concerns in China and focusing on optimism in the economy. That optimism led to cyclical stock outperformance later in the week.

The markets opened this week mixed as investors started to take notice of the debt ceiling debate. If you remember, last week, I mentioned that this was my biggest concern. Both parties in Congress appear to remain deadlocked on raising the debt ceiling.

The debt ceiling is the maximum amount of money the U.S. can borrow cumulatively by issuing bonds to meet obligations. If the debt ceiling isn't raised, the government would likely default and not be able to pay its bills. This would create chaos.

Lifting the limit does not create any new spending, but it allows the government to finance existing obligations that were already approved. The U.S. has never defaulted on its credit since the debt ceiling was started in 1917, and Congress has never failed to raise it.

However, it's more than likely that Republicans and Democrats will find a way to compromise. Businesses and large financial institutions certainly don't want a default, so I imagine a certain amount of lobby might get a deal done.

Plus, there is also a fallback if both parties can't come to an agreement, although it is highly unlikely. Based on a technicality, the Treasury Department can print a platinum coin, assign a large value to it, and then sell it to the Federal Reserve Board. This would, in theory, get around the need to borrow, but let's hope it doesn't come to that.

Stocks fell on Tuesday as investors grew concerned over a rise in U.S. treasury yields. Technology stocks led the way as the Nasdaq composite fell by more than 2.5% at the close. It was the worse day for the tech-oriented index since March. The yield on the 10-year note rose more than five basis points to 1.54%, its highest level since June.

Adding to worries was a disappointing report on consumer confidence in September. The Conference Board's Consumer Confidence Index fell to its lowest level since February due to concerns over COVID and inflation. This is the third consecutive month consumer confidence dropped.

However, there was a massive jump in home prices in July. Prices surged 19.7%, up from 18.7% in June. This is the largest jump in over three decades. While it seemed like the housing market was starting to cool, prices remained elevated. For instance, in my home state of Massachusetts, a burned home was recently listed with an asking price of almost $400,000. As for today, the market ended mixed as Treasury yields stayed near multi-month highs.

Looming issues such as COVID, inflation, Evergrande in China, and a possible government shutdown are likely to trigger volatility in the short term. But the good news is that the market continues to bounce back.

Even with tapering getting closer, that does not mean the Fed will end its stimulus. Plus, as I've mentioned before, the current quarter is looking strong for corporate earnings. We may even get additional fiscal stimulus if the President can get his bill passed. Based on these factors, stocks are still the best place to be.

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All the Best!

David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $431.54 per share on Thursday afternoon, down $2.91 (-0.67%). Year-to-date, SPY has gained 16.55%, versus a % rise in the benchmark S&P 500 index during the same period.

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for StockNews.com and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers.

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