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The US stock market is about to wrap up its sixth consecutive quarter of gains, a run not seen since 2017, having added some $600bn in value since the summer despite a debt scare in China and slowing global growth.
But the pace of gains has moderated. The blue-chip S&P 500 index of large companies was up 1.4 per cent in the quarter as the final trading day began — tame by the standards of the rapid rally over the past year-and-a-half. More than 225 companies in the index fell in value during the period, including heavyweights such as Amazon and Facebook.
The milder rally suggests that investors are questioning whether they are about to lose one of the main drivers of the market: hundreds of billions of dollars worth of central bank stimulus each month that has helped prop up stock and bond prices. The Federal Reserve signalled after its most recent policy meeting last week that the economy was almost strong enough for it to begin scaling back its bond-buying programme and eventually lift interest rates.
“The game is going to work until it doesn’t and when it doesn’t . . . I foresee something very violent,” said Mike Lewis, the head of US equity cash trading at Barclays. “I could see a real equity market drawdown. You’ve had 14 years of global co-ordinated central bank accommodative behaviour.”
A growing list of concerns rattled investors as the quarter came to an end, with shifts from central banks across the globe that could presage tighter monetary policy sparking a sell-off in the bond market that ricocheted into the $51tn US stock market.
Shares of healthcare and financial services companies nonetheless delivered support, with lift for the S&P 500 provided by some of its largest constituents, including Tesla and Google parent Alphabet.
But glimmers of how investors might behave in a world of tighter monetary policy were evident as the quarter came to an end. While small cap and transportation stocks that are more sensitive to economic growth ended the quarter lower, both began to dramatically outpace the tech-dominated S&P 500 in the final days of September. All three indices — the S&P 500, Dow Jones Transportation Average and Russell 2000 — ended the month lower, with the benchmark S&P 500 suffering its first monthly loss since January.
“Markets have been holding in, but the strength has not been broad-based and there has been a rotation taking place below the headline returns,” said Ralph Bassett, head of North American equities at Abrdn, the $700bn asset manager.
Even amid mounting concerns, stocks have still largely remained the port of call for retail and institutional investors, with funds that buy US equities counting more than $40bn of inflows in the quarter, according to preliminary data from EPFR.
Market measures of volatility have perked up after trending lower from highs hit at the start of the year. The more turbulent trading has been propelled by fears of how a default of Chinese property developer Evergrande could ripple out, as well as how slowing economic growth will hit markets.
Bassett said the economy was fundamentally strong, but investors were grappling with how to balance the “tension between wanting exposure to growth, and rising interest rates and thus discount rates that could act as a headwind”.