September Selloff Reset Investor Expectations. Why That’s Good News

Text size

This commentary was issued recently by money managers, research firms, and market newsletter writers and has been edited by Barron’s.

Resetting Investor Expectations

Market Perspective
Truist Advisory Services
Sept. 30: Stocks have seen a bumpier path in September, consistent with the typical seasonal weakness and our expectations. Entering October, choppy waters are likely to continue, given the ongoing political wrangling and debt-ceiling drama. That said, as we move later into the month, the seasonal backdrop should become more supportive. Moreover, we are encouraged by a sharp reset in investor expectations toward the economy, markets, and cyclical sectors, including small-caps.

Markets are all about how data come in relative to expectations, as opposed to whether data are good or bad on an absolute basis. Our work suggests this reset to investor expectations is setting the market up for positive surprises later in the fourth quarter. Thus, we would stick with the market’s primary uptrend and use any weakness over the coming weeks to position for further strength into year end.

—Keith Lerner

Dollar’s Decline Is Under Way

Equity Market Outlook
Neuberger Berman
Sept. 29: The strategic decision to select stocks, sectors, factors, regions, and asset classes that benefit from reflation or disinflation tends to be among the most consequential for performance over a five- to 10-year horizon. An awareness of whether we are in a bull or bear cycle for the U.S. dollar can act as a useful guidepost. A bear cycle implies higher U.S. inflation, and a bull cycle, lower inflation, relative to the rest of the developed world. As such, U.S. dollar bear cycles tend to favor reflationary assets, regions, sectors, and factors, while bull cycles tend to favor allocations geared more to disinflation.

U.S. dollar cycles have tended to exhibit a cadence of seven to 10 years, and we think the dollar completed a nine-year bull run in March 2020 and has entered a multiyear bear market. Our view is supported by gross-domestic-product growth projections from the International Monetary Fund, which forecasts a decline in the U.S.’s proportional contribution to world GDP starting in 2022—another dynamic that has historically been associated with a weaker dollar.

Since at least the early 20th century, a weakening dollar and relatively stronger U.S. inflation have historically coincided with the outperformance of European over U.S. stocks, and emerging markets over the developed markets. Among…