A strong second quarter earnings season through July and August was enough to help investors look past mounting concerns. All that changed as the calendar flipped to September and the issues facing the market became too great to ignore. The final month of the quarter saw yields jump higher, questions arise around the investability of China, inflation continue to run hot, supply chain bottlenecks remain unresolved, partisan and intra-party fighting bring legislation to a halt, a hawkish move by the Fed and signs of a slowing economy. Little wonder there was a September swoon. The performance of equities also shifted, resembling what was seen in the first months of the year. As rates rose, cyclical/value stocks had a relative advantage while growth issues saw their relative performance dinged. Outsized gains in July and August still left growth equities ahead of their value peers for the quarter, but the September shift in performance was pronounced. International equities also largely followed US stocks lower in the final month, and for the quarter the S&P 500 easily bested the EAFE and EM indices. Emerging markets were weighed down in particular from the weakness in China, where solvency questions surrounding a major real estate development company led to a spike in mentions of “Lehman Brothers” to end the quarter.
Propelled by five consecutive all-time closing highs to end the quarter, the S&P 500 enjoyed its second-best first half since the dot com bubble. The first quarter of the year had been highlighted by soaring value stocks, meme stock mania and a reflation trade as the global economy showed signs of synchronized growth. Stock leadership in the second quarter looked vastly different, however: Growth stocks reasserted themselves as the economic narrative shifted from seemingly limitless expansion potential to “peak everything.” Thanks to the strong outperformance earlier in the year, value stocks still held an edge for year-to-date performance—but the gap narrowed from nearly 10.5 percentage points to just two. Mega-cap stocks were the driving force behind the record close at quarter end as the S&P 500 Equal Weighted Index was unable to reclaim its all-time high reached in the beginning of June. Similar to the value/growth dynamic, Mid and Smallcap stocks still held a performance edge for the year to date but saw their largecap peers outperform for the quarter. Looking abroad, foreign stocks largely lagged the US returns as questions surrounding the reflation trade dented Emerging Markets and Covid variants led to fresh lockdowns in some European countries.