The Stock Market’s Hot Summer Became a Swoon. Where Does It Go Next?

Just four weeks ago, the stock market looked unstoppable. Seven straight months of gains had left the S&P 500 index up 21 percent for the year, corporations enjoyed record profits and economists predicted the fastest growth in decades.

All that changed in September.

The S&P 500 suffered its worst monthly drop since the start of the pandemic, as investors jettisoned tech stocks, small companies and industrial shares in the face of a befuddling mix of signals about the next chapter of the pandemic recovery.

Now, with the fourth quarter underway, slowing growth, rising inflation, supply chain snarls and the persistent threat of the coronavirus all threaten to erode investor confidence and clobber corporate profits — just as brinkmanship in Washington has all but dashed hopes for further fiscal stimulus. Hovering above the fray is the Federal Reserve, which has indicated that it is about to pare back the money-printing programs that fueled the market’s rise over the last 18 months.

In short, despite the improving public health situation, some investors now expect the final three months of 2021 to be the bumpiest since the pandemic crashed the market in early 2020.

“We’ve seen a tremendous amount of government support and stimulus,” said Matt Quinlan, portfolio manager for the $3.5 billion Franklin Equity Income Fund. “There’s an element of, you know, ‘What happens from here?’”

All these issues have been simmering for months, but they didn’t seem to bother investors until late September. Then came the Fed’s signal that it was all but certain to start cutting back — or tapering — the $120 billion in new money it has been pouring into markets every month since the pandemic hit.

That money has been a primary catalyst for the market’s explosive rise even as the pandemic upended most facets of our daily lives.

“You’ve had a market that has been heavily reliant on this overflowing bowl of stimulus,” said Edward Moya, a senior market analyst at Oanda, a foreign currency exchange and brokerage firm. “I think the market is really going to struggle once it loses its fix.”

September began with mixed results, but the Fed’s announcement transformed what had been a slight decline into a rout. The S&P 500 ended September down 4.8 percent, the blue-chip bench mark’s worst monthly showing since March 2020.

The market’s performance on the first day of October reflected the changeable nature of investor opinion: The S&P rose 1.2 percent as investors welcomed an announcement from Merck about an antiviral pill to treat Covid-19.

Before the arrival of such volatility in September, the summer had been remarkably smooth.

Stocks seemed to clamber to record highs almost every day, even as the Delta variant of the coronavirus complicated the recovery around the world and economists began to quickly cut back forecasts for the best economic growth in decades. There were 53 new highs through the end of August, the most at that point in the…