September markets are typically rocky as summer’s calm fades. This September was no different with markets sifting through slowing economic growth and data showing that pandemic-related inflation, supply chain disruptions, and labor market woes are real. Washington stressed markets as government funding, the debt ceiling, and infrastructure bills bubbled up to the surface amid contentious party politics. Then there’s China. The ripple effects of Beijing’s regulatory crackdown continued to fluster markets. So now as deadlines converge and with votes set to commence, it seems like last month’s rockiness may continue.

The S&P 500 Index returned -4.65% for the month, and 0.58% in Q3, bringing its year-to-date total return to 15.91%. The Nasdaq Composite Index returned -5.27% for the month, bringing its Q3 return to -0.22%. There was significant divergence across sectors, highlighting the importance of considering the positioning of specific sectors for the current macroeconomic environment.

The Debt Ceiling Spectacle

Like clockwork, the U.S. will run up against its annual statutory debt limit in mid-October. The Biden administration asked Congress to raise the debt ceiling, which should be nothing more than a formality, as money for projects approved by the previous administration has already been spent. But thus far Republicans have refused to give their consent on what should always be a bipartisan action. If the government can’t borrow money to meet its obligations, the markets won’t react well in the short term and the risks of a recession rise, a remarkably self-induced one at that. Treasury Secretary Janet Yellen warned that the debt ceiling must be raised or there will be terrible consequences.

We can opine on the political machinations, but this posturing is now something of an annual rite of fall. Markets know that the debt ceiling will be raised. The question is whether it comes at a significant cost. While it would be better if the increase is passed sooner rather than later, the deadline isn’t until some fuzzy date in October (likely October 18th), depending on how creative the Treasury can be. Congress moved on Thursday to prevent a government shutdown before the midnight deadline. Both chambers of Congress passed a bill that would fund the government through December 3, averting a government shutdown.

Infrastructure Both Hard and Social

The Senate passed a bipartisan bill to authorize $550 billion in new spending on hard infrastructure including roads, bridges, and tunnels. Now it goes back to the House, where prospects of the bill’s passage are murky amid moderate and progressive demands on the Democratic side.

The fate of the bipartisan infrastructure package is linked to the Biden administration’s ambitious $3.5 trillion reconciliation package for social initiatives, which includes spending for child and elderly healthcare and climate change. Progressives want to delay the infrastructure bill until the $3.5 trillion package is ready. Moderates want the infrastructure bill enacted first. Democratic leadership promised centrists a vote on the bipartisan infrastructure bill on September 27, but it is unlikely these bills will be passed in the near future.

On the Positive Side: Financials, Health Care, and Industrials

We expect some of the challenges currently facing the markets may improve through into year-end, with certain sectors poised to benefit. The market reacted well to Federal Reserve Chair Jerome Powell signaling that the start of tapering their asset purchases is likely to be announced at their upcoming November meeting. We expect tapering to be positive for Financials because it will likely steepen the yield curve, encouraging banks to lend more broadly. Following the September Federal Open Market Committee (FOMC) meeting, the 10-year Treasury yield rose from 1.3% on the 22nd of September to end the quarter at 1.5%.¹

Other sectors for which we have a more positive view include Health Care, the sector may benefit from social components of the budget reconciliation package. The bill may include investment in the U.S.’ aging population, which the Biden administration wants to keep in good health by implementing extensive drug protocols that keep drug prices in check. Legislation to control drug prices or raise corporate taxes could negatively impact Health Care, though we expect moderate Democrats to thwart any major changes.

With or without a comprehensive infrastructure package, the Industrials sector combines cyclicality with a quality orientation. We expect the sector to benefit from a reshoring of supply chains and increased automation, among other factors that support increased spending on infrastructure in the years ahead.

Here are our current views on all 11 sectors.