Three factors point to a pretty tough environment for equities – BMO

Equity markets slumped last week, with the S&P 500 Index down 1.7%. Here is a look at three challenges facing stocks, in the view of economists at the Bank of Montreal.

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Seasonal factors

“The market is currently right in the toughest part of the calendar from a historical perspective. Between 1950 and 2020, August (flat) and September (-0.5%) have recorded the weakest average monthly returns. If there was some concern heading into this period after a very strong spring and early summer (and not to jinx it with three weeks still to go in September), those concerns have eased so far.”

Delta variant

“Rising COVID-19 cases across much of the developed world have slowed down some regional reopening and the travel that was expected to return with vigour in the second half of the year. As a result, growth has been coming in under expectations, and revisions have been tilted to the downside.”

Fed tapering

“The start of the road toward less-accommodative Fed policy has not spooked the market, unlike in some past episodes, but inflation concerns only seem to be mounting at this point. US job openings, for example, are now at the highest level on record dating back to the early-2000s, by a long shot, and supply-side issues (growth negative and inflation positive) look to persist well into next year.”