September lived up to its reputation for being a rough month for stocks and broke the string of back-to-back gains in July and August. Despite the pullback, the broad market eked out another positive full quarter, and the S&P 500 remains solidly positive for the year. The market action in September and early October has been volatile yet understandable, and it might foreshadow the debates that will shape stocks’ performance this quarter and into 2022.

Interest rates and the COVID Delta variant surge were predominantly on investors’ minds this summer. Tugs-of-war on both fronts are being seen daily in the markets. On the one hand, rates move higher as economic forecasts accelerate. On the other hand, higher rates impede valuations for high-flying growth stocks with pricey multiples and, in many cases, no profits (for years). Similarly, when the Delta variant news is good, beneficiaries of the broad economic reopening perform well. But progress against COVID also means a better economy which argues for higher interest rates, which is bad. Or is it good? Conversely, when Delta shows signs of surging, the economy suffers, which is bad. But then Fed will keep rates lower for longer, which is good. Right? You can see how circular it gets with these two issues.

Fed Reserve Chair Powell believes that despite Delta and despite the transitory inflation due to global supply chain bottlenecks, any pause in this recovery is just that, transitory. Part of that argument must be that the economy is poised to really fly when the twin anchors that are labor shortages and supply chain disruptions are weighed. Two drivers of our domestic economy, banks and consumers, are in terrific shape financially. And other industries are poised to jump when goods are delivered and when jobs are filled. Americans are dying to travel, but airline labor shortages and ticket prices are turning flyers away. These are classic short-term supply and demand imbalances that competitive markets will resolve in time.

In a complex, dynamic global economy, the outcomes regarding interest rates and/or the COVID Delta variant are anything but straightforward as it pertains to investing. As we say often, this is another reason to look at each individual operating company and its ability to compete and profit in a range of possible environments. It would be great to be able to have rules like “buy banks when interest rates are rising.” Simple: They can lend at higher rates which makes them more profitable. But…they also pay higher rates on deposits, which hurts profits. And if rates are going up because of inflation, they must pay their employees more, which means higher costs. However, if widespread wage inflation means employees in all sectors have higher wages, then more people can afford borrow money from the bank to buy a house, which is positive. Or is it not?  It’s complicated. Stay tuned.