Volatility Strikes Back

US equities experienced the return of volatility toward the end of September as economic growth concerns, legislative turmoil, and rising interest rates sparked a stretch of choppy trading.

The S&P 500 Index fell 4.8% over the month, snapping a lengthy streak of consecutive monthly increases. Global equity markets suffered in sympathy, with both developed and emerging markets experiencing low-to-mid single digit declines.

Within fixed income, US Treasury rates accelerated higher into the final days of September, with the benchmark US 10-Year Treasury Note breaking back above the symbolic 1.5% rate. Bond prices move inversely to interest rates, and as a result of the rate rise, aggregate fixed income performance was modestly lower for the month.*

Our Perspective

The speed of the economic rebound and lack of a true reset during the recession seems to have sped up the economic cycle. Our indicators are showing a US economy that is entering a mid-cycle state.

Given today’s abundance of rising risks and uncertainties, as well as considering the elevated level of equity valuations, it is no surprise that stock market volatility finally reemerged. On balance, we believe our relatively neutral multi-asset class positioning remains appropriate.

The Magic of SaaS

Software-as-a-Service (SaaS) is flipping old technology business models on their head. Instead of selling software as a one-time purchase, more and more software vendors are offering their solutions as ongoing subscriptions, over the internet, and via the cloud.

Our Perspective

SaaS solutions are a classic win-win situation for both the buyer and seller. Customers sign up for ongoing support, the most up-to-date and secure software, and a lower total cost of ownership (by way of outsourcing vs in-house). Vendors appreciate the consistency and stability of revenues.

The evolution of the SaaS business model is driving an explosion of software solutions into a variety of applications and use cases. Some are broad, and many are very niche. As startups and other businesses attack this open sea of possible verticals, they are, in general, pursuing a growth-at-all-cost mentality, increasing upside and downside.

We believe SaaS is opening up opportunity for discerning investors, and our bottom-up processes have identified several areas we like.

For more, read our recent blog post, Revisiting the Opportunity in SaaS.

Investing in Railroads

Railroads aren’t the flashiest of investments, and they are considered cyclical businesses. Their fortunes tend to rise and fall with the broader economy. Like much of the logistics sector, they too suffered from falling volumes during the depths of the pandemic.

Since then, business activity has sharply rebounded. While long-term investors shouldn’t get carried away with their growth expectations, the rails are doing well, again.

Our Perspective

The railroad industry has evolved in recent years, becoming increasingly efficient and cost conscious. Their businesses are naturally very capital intensive with high barriers to entry and few substitutes.

In our view, there is not a significant degree of differentiation between the railroad operators. As a result, and counterintuitively, we believe the laggard operators who have been experiencing higher costs and less efficient operations represent an attractive opportunity from a ‘catch up’ perspective versus their better executing peers.

For more, read our recent blog post, Investments that Chug Along.

Our View
Economic Cycle		Growth remains robust, and we believe the economy has moved into a mid-phase of the cycle; many countries are now lapping their massive fiscal spending programs, causing the massive liquidity tailwinds to begin to dissipate
Stock Market		US stock market volatility has picked back up; equities are modestly below all-time highs, although they remain strongly higher year-to-date; valuations are still fairly elevated and there are a variety of rising risks that warrant monitoring
Bond Market		After drifting lower throughout the summer, interest rates sprung to life at the end of September, reflecting shifting expectations on inflation, growth, and central bank policy; corporate and municipal bond credit spreads remain historically tight
Foreign Exchange		While we believe the dollar may weaken longer-term, in the short-term, it is difficult to make the argument that currencies will swing significantly
Important Issues on the Radar		COVID-19: although the Delta variant has caused regional flare-ups, we still believe the worst of the crisis is behind us from an economic perspective, particularly within the US
		Trade Tensions: relations are in structural decline as China focuses on becoming a self-sufficient, global hegemon, potentially impacting global trade and supply chains
		Credit Cycle: China is relatively far along in its economic cycle, and elements of policy tightening are occurring that may act as a headwind to global macroeconomic growth ahead
		Inflation vs. Deflation: the significant demand shock and remaining economic slack are disinflationary broadly, but certain bottlenecks are sparking some transitory inflation issues near-term

 Indicates change

All investments contain risk and may lose value. This material contains the opinions of Manning & Napier, which are subject to change based on evolving market and economic conditions. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

This newsletter may contain factual business information concerning Manning & Napier, Inc. and is not intended for the use of investors or potential investors in Manning & Napier, Inc. It is not an offer to sell securities and it is not soliciting an offer to buy any securities of Manning & Napier, Inc.

*Sources: Refinitiv and Treasury.gov.

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