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Highlights
Globally, stocks finished the week lower with the MSCI All Country World Index falling 1.2%. In the U.S., the S&P 500 dropped 1.7% while the Dow Jones Industrial Average slipped 2.2%. Shares in Japan surged 3.5% as investors bought beaten-down stocks. The 10-year U.S. Treasury yield was little changed – rising just under 2 basis points to 1.34%.
Investors appear increasingly nervous about the prospect of a potential stock market correction (defined as a sell-off of 10% or more). Are they right to be nervous? We think the short answer to the question is no.
We are not arguing that a pullback or correction is not possible. Indeed, there are several catalysts coalescing that could cause one, but we think that investors should remain focused on their long-term goals and stay invested. The U.S. economy appears to be moderating some, but remains on solid footing overall. If anything, the economy appears to be suffering from too much demand chasing too few goods, services, and workers. Eventually those supply-side constraints will ease as the economy continues to normalize as the world learns to coexist with COVID-19. That could potentially support further corporate earnings growth and higher stock prices in the years ahead.

Citi Personal Wealth Management
The Week in Review
The House Ways and Means Committee proposed a slimmed down tax plan.
Under the Democratic proposal, the top corporate tax rate would rise from 21% to 26.5% – less than the 28% rate that the Biden Administration had sought, but slightly more than 25% rate that Citi Research was expecting. The top tax rate on capital gains would rise from 20% to 25%, instead of the 39.6% President Biden proposed. When the 3.8% Medicare surtax is included, the top capital gains rate would be 28.8%. The House Ways and Means Committee will debate the tax portion of the agenda this Tuesday. With thin majorities in both chambers of Congress, Democrats can afford just three defections in the House and none in the Senate with every Democrat vote needed to pass the agenda through the budget reconciliation process. While West Virginia Democrat Joe Manchin has expressed that he does not support $3.5 trillion in spending and is worried about inflation, history suggests that the bills have high odds of passage with 21 of 25 (or 85%) of past budget reconciliation bills having went on to be signed by the President. The self-imposed date for a vote is September 27, but it is not a binding date and can be missed without any serious ramification.
Weekly Market Updates
Should Investors Be Nervous?
With the S&P 500 having rallied 36.8% without a 5%+ pullback over the last 318 calendar days, it makes sense that investors are becoming nervous about a potential correction. However, the length of the rally tells us very little with the S&P 500 having once gone nearly 7 years between 1990-1997 without a single double-digit correction. Since 1950, the S&P 500 has experienced 37 double-digit drawdowns over a span of about 70 years – implying that a double-digit drawdown occurs on average a little more than every other year (see figure 1). Thus, there is no real reason that we have to have a correction, but September is often viewed as a difficult month for the U.S. stock market with the S&P 500 averaging a loss of about 0.2% since 1990 (see figure 2). It may also be worth noting that the S&P 500 fell 9.6% in September 2020, but we don’t think that seasonality alone should be driving the market narrative.
Peak Date | Trough Date | Peak Price | Trough Price | Percent Loss | Number of Days |
---|---|---|---|---|---|
6/12/1950 | 7/17/1950 | 19.4 | 16.68 | -14.0 | 35 |
1/5/1953 | 9/14/1953 | 26.66 | 22.71 | -14.8 | 252 |
9/23/1955 | 10/11/1955 | 45.63 | 40.8 | -10.6 | 18 |
8/2/1956 | 2/12/1957 | 49.74 | 42.39 | -14.8 | 194 |
7/15/1957 | 10/22/1957 | 49.13 | 38.98 | -20.7 | 99 |
8/3/1959 | 9/28/1960 | 60.71 | 52.48 | -13.6 | 422 |
12/12/1961 | 6/26/1962 | 72.64 | 52.32 | -28.0 | 196 |
8/22/1962 | 10/23/1962 | 59.78 | 53.49 | -10.5 | 62 |
2/9/1966 | 10/7/1966 | 94.06 | 73.2 | -22.2 | 240 |
9/25/1967 | 3/5/1968 | 97.59 | 87.72 | -10.1 | 162 |
11/29/1968 | 5/26/1970 | 108.37 | 69.29 | -36.1 | 543 |
4/28/1971 | 11/23/1971 | 104.77 | 90.16 | -13.9 | 209 |
1/11/1973 | 10/3/1974 | 120.24 | 62.28 | -48.2 | 630 |
11/7/1974 | 12/6/1974 | 75.21 | 65.01 | -13.6 | 29 |
7/15/1975 | 9/16/1975 | 95.61 | 82.09 | -14.1 | 63 |
9/21/1976 | 3/6/1978 | 107.83 | 86.9 | -19.4 | 531 |
9/12/1978 | 11/14/1978 | 106.99 | 92.49 | -13.6 | 63 |
10/5/1979 | 11/7/1979 | 111.27 | 99.87 | -10.2 | 33 |
2/13/1980 | 3/27/1980 | 118.44 | 98.22 | -17.1 | 43 |
11/28/1980 | 8/12/1982 | 140.52 | 102.42 | -27.1 | 622 |
10/10/1983 | 7/24/1984 | 172.65 | 147.82 | -14.4 | 288 |
8/25/1987 | 12/4/1987 | 336.77 | 223.92 | -33.5 | 101 |
1/2/1990 | 1/30/1990 | 359.69 | 322.98 | -10.2 | 28 |
7/16/1990 | 10/11/1990 | 368.95 | 295.46 | -19.9 | 87 |
10/7/1997 | 10/27/1997 | 983.12 | 876.99 | -10.8 | 20 |
7/17/1998 | 8/31/1998 | 1186.75 | 957.28 | -19.3 | 45 |
7/16/1999 | 10/15/1999 | 1418.78 | 1247.41 | -12.1 | 91 |
3/24/2000 | 10/9/2002 | 1527.46 | 776.76 | -49.1 | 929 |
11/27/2002 | 3/11/2003 | 938.87 | 800.73 | -14.7 | 104 |
10/9/2007 | 3/9/2009 | 1565.15 | 676.53 | -56.8 | 517 |
4/23/2010 | 7/2/2010 | 1217.28 | 1022.58 | -16.0 | 70 |
4/29/2011 | 10/3/2011 | 1363.61 | 1099.23 | -19.4 | 157 |
5/21/2015 | 8/25/2015 | 2130.82 | 1867.61 | -12.4 | 96 |
11/3/2015 | 2/11/2016 | 2109.79 | 1829.08 | -13.3 | 100 |
1/26/2018 | 2/8/2018 | 2872.87 | 2581 | -10.2 | 13 |
9/20/2018 | 12/24/2018 | 2930.75 | 2351.1 | -19.8 | 95 |
2/19/2020 | 3/23/2020 | 3386.15 | 2237.4 | -33.9 | 33 |

There are a number of reasons that investors have been fretting about a potential sell-off, including the following:
- The pace of U.S. economic growth and earnings-per-share (EPS) growth may have peaked as the initial reopening surge starts to normalize
- Supply-side constraints remain relevant and the lack of qualified workers could lead to a jump in wages, which could pressure margins
- The Fed could act faster-than-anticipated in response to rising inflation (investors will receive the August Consumer Price Index (CPI) print this Tuesday) or the pace of tapering could surprise investors
- Interest rates could head higher once again and challenge technology shares as they did in mid-February
- Washington, D.C. could surprise investors if infrastructure talks completely collapse, the debate to raise the debt ceiling heats up, or if the federal government is forced to shut down due to a disagreement on fiscal year 2022 funding. Importantly, raising the debt ceiling requires 60 votes in the Senate.
- Chinese policymakers continue to make waves as they crackdown on the private sector, which is making investors nervous about the world’s second largest economy.
Most of these worries seem overblown, but when taken together, it is certainly possible that we see a correction. So how should investors think about this? Should they be nervous or not? We think the short answer is no, but let us give a long answer because that’s what former economists do.
First, we should acknowledge that the economy is slowing some with the Atlanta Fed GDPNow forecast now tracking at about 3.6%. The Fed also acknowledged this in their Beige Book, which said that the U.S. economy downshifted slightly in August and that “The deceleration in economic activity was largely attributable to a pullback in dining out, travel, and tourism in most Districts, reflecting safety concerns due to the rise of the Delta variant, and, in a few cases, international travel restrictions.” That said, we find it encouraging that timely business surveys like the ISM composite index, which is monthly gauge on economic activity in the manufacturing and services sectors, still points towards quarter-on-quarter annualized growth that is between 5% to 6% (see figure 3). While below the 6.6% 2Q real gross domestic product (GDP) print, recent data are far from signaling a stalling of the economy. To the contrary, the data seem to suggest an economy that is being held back by supply constraints – both labor constraints and product constraints (semi-conductors, etc.).

The August employment report is an excellent example of such constraint. While the report disappointed with the economy adding just 235,000 jobs during the month (the economy added over 1 million jobs the month prior), it needs to be put into context. The first thing to note is that the Bureau of Labor Statistics said that about 5.4 million people said they were still not able to work due to COVID in August, which was up 400,000 from the month prior. That seems to imply that a broadening of vaccinations or fading of Delta cases could lead to a continued recovery in employment in the hospitality sector. We should also remember that the economy added 785,000 jobs in March 2021, then dropped to 269,000 jobs in April, and then rebounded back in May – adding 614,000 jobs. This is not the first weak (or even the worst) employment report we have seen during this economic recovery. In fact, during the fourth quarter of 2020, the U.S. economy averaged just 64,000 jobs a month. We have seen these ups and downs before and financial markets reacted very little.

We would also point out that the U.S. economy has a record number of job openings right now with 10.9 million job openings available. That seems to imply that the labor market is suffering from a supply issue…not a demand issue with employers still seeing enough demand that that want to hire more people, but can’t find enough qualified workers. Perhaps this is because some people still wish to care for unvaccinated children or maybe they are drawing down savings while they look for a better job than they previously held. Either way, the problem does not seem to be the strength of the economy…it seems to be constraints caused by the global pandemic.
In terms of how the employment report impacts the Fed, it seems safe to say that an announcement that the Fed intends to begin tapering the pace of its bond purchases is unlikely to occur before November. However, odds still seem to favor an announcement before year-end. Depending on the details, financial markets could experience increased volatility around this event, but we think that the U.S. stock market will be able to handle a well-telegraphed announcement as the Fed has been signaling a desire to remain accommodative for as long as needed. Rising inflation could of course change this trajectory, but we think that peak inflation may be increasingly near.
The path ahead for Fed policy may also be somewhat dependent on fiscal policy with a grand fiscal finale from Congress likely near month-end. Not only is Congress debating the Biden Administration’s proposed infrastructure agenda (please see the Week Ahead section for details about the tax proposals), but it must also vote to raise the debt ceiling and fund the federal government for fiscal year 2022. While the September 27 vote on infrastructure is self-imposed and non-binding, meaning it can be missed, the deadline to fund the government by September 30 is binding and an agreement is needed to avert a federal government shutdown.
We are expecting financial markets to be gripped by Washington headlines in coming weeks, but we think it’s important to not overreact. Since 1976, the federal government has shutdown 21 times with the average shutdown lasting about 8 days. During those shutdowns, the S&P 500 averaged a return of +0.1%, which is essentially unchanged (see figure 5). The worst performance was in 1979 under Jimmy Carter when the S&P 500 fell 4.4%.
Year | President | Dates of Federal Government Shutdown | Number of Days | S&P 500 Performance During the Shutdown (%) |
---|---|---|---|---|
1976 | Gerald Ford | September 30 to October 11 | 10 | -3.4 |
1977 | Jimmy Carter | September 30 to October 13 | 12 | -3.2 |
1977 | Jimmy Carter | October 31 to November 9 | 8 | 0.7 |
1977 | Jimmy Carter | November 30 to December 9 | 8 | -1.2 |
1978 | Jimmy Carter | September 30 to October 18 | 18 | -2.0 |
1979 | Jimmy Carter | September 30 to October 12 | 11 | -4.4 |
1981 | Ronald Reagan | November 20 to November 23 | 2 | -0.1 |
1982 | Ronald Reagan | September 30 to October 2 | 1 | 1.3 |
1982 | Ronald Reagan | December 17 to December 21 | 3 | 0.8 |
1983 | Ronald Reagan | November 10 to November 14 | 3 | 1.3 |
1984 | Ronald Reagan | September 30 to October 3 | 2 | -2.2 |
1984 | Ronald Reagan | October 3 to October 5 | 1 | 0.1 |
1986 | Ronald Reagan | October 16 to October 18 | 1 | -0.3 |
1987 | Ronald Reagan | December 18 to December 20 | 1 | 0.2 |
1990 | George H.W.Bush | October 5 to October 9 | 3 | -2.1 |
1995 | Bill Clinton | November 14 to November 19 | 5 | 1.3 |
1995-1996 | Bill Clinton | December 16, 1995 to January 6, 1996 | 21 | 0.1 |
2013 | Barack Obama | October 1 to October 17 | 16 | 2.3 |
2018 | Donald Trump | January 20 to January 23 | 3 | 1.0 |
2018 | Donald Trump | February 9 | 1 | 1.5 |
2018-2019 | Donald Trump | December 22, 2018 to January 25, 2019 | 34 | 10.3 |
Average | average number of days shut down is 7.8 Days | average percent change for S&P 500 Performance During Past Federal shutdowns is +0.1% |
Likewise, there has been only one year when the S&P 500 posted a negative annual return in the year that either the top income, corporate, or capital gains tax rate was changed (see figure 6). That occurred in 1969 when the US economy experienced a recession as President Johnson tried to close a budget deficit caused by the Vietnam War while the Federal Reserve tightened its monetary policy. That is far from the situation investors face today.
Year | Old Tax Rate | New Tax Rate | President | Legislative Act | S&P 500 Total Return | Real U.S. GDP YoY (%)year of year change in percent |
---|---|---|---|---|---|---|
1968 | 70.0% | 75.3% | LBJ | Revenue and Expenditure Control Act of 1968 | 11.04% | 4.91% |
1969 | 75.3% | 77.0% | LBJ | Revenue and Expenditure Control Act of 1968 | -8.40% | 3.13% |
1991 | 28.0% | 31.0% | Bush Jr. | Revenue Reconciliation Act of 1990 | 30.47% | -0.11% |
1993 | 31.0% | 39.6% | Clinton | Omnibus Budget Reconciliation Act | 10.08% | 2.75% |
2013 | 35.0% | 39.6% | Obama | American Taxpayer Relief Act of 2012 | 32.39% | 1.84% |
Average | Real U.S. GDP YoY (%)year of year change in percent is15.11% | average percent change for S&P 500 total return is 2.51% |
Year | Old Tax Rate | New Tax Rate | President | Legislative Act | S&P 500 Total Return | Real U.S. GDP YoY (%)year of year change in percent |
---|---|---|---|---|---|---|
1964 | 91.0% | 77.0% | LBJ | Revenue Act of 1964 | 16.43% | 5.76% |
1965 | 77.0% | 70.0% | LBJ | Revenue Act of 1964 | 12.46% | 6.50% |
1970 | 77.0% | 71.8% | Nixon | Tax Reform Act of 1969 | 3.89% | 0.19% |
1971 | 71.8% | 70.0% | Nixon | Tax Reform Act of 1969 | 14.22% | 3.29% |
1981 | 70.0% | 69.1% | Reagan | Economic Recovery Tax Act of 1981 | -4.88% | 2.54% |
1982 | 69.1% | 50.0% | Reagan | Economic Recovery Tax Act of 1981 | 21.50% | -1.80% |
1987 | 50.0% | 38.5% | Reagan | Tax Reform Act of 1986 | 5.18% | 3.46% |
1988 | 38.5% | 28.0% | Reagan | Tax Reform Act of 1986 | 16.61% | 4.18% |
2001 | 39.6% | 39.1% | Bush Jr. | Economic Growth and Tax Relief Reconciliation Act of 2001 | -11.89% | 1.00% |
2002 | 39.1% | 38.6% | Bush Jr. | Economic Growth and Tax Relief Reconciliation Act of 2001 | -22.10% | 1.74% |
2003 | 38.6% | 35.0% | Bush Jr. | Jobs and Growth Tax Relief Reconciliation Act of 2003 | 28.68% | 2.86% |
2018 | 39.6% | 37.0% | Trump | Tax Cut and Jobs Act of 2017 | -4.38% | 3.00% |
Average | Real U.S. GDP YoY (%)year of year change in percent is6.31% | average percent change for S&P 500 total return is 2.73% |
Year | Old Tax Rate | New Tax Rate | President | Legislative Act | S&P 500 Total Return | Real U.S. GDP YoY (%)year of year change in percent |
---|---|---|---|---|---|---|
1950 | 38.0 | 42.0 | Truman | Revenue Act of 1950 | 31.45% | 8.68% |
1951 | 42.0 | 50.8 | Truman | Revenue Act of 1951 | 23.97% | 8.05% |
1952 | 50.8 | 52.0 | Eisenhower | Revenue Act of 1951 | 18.16% | 4.09% |
1968 | 48.0 | 52.8 | LBJ | Revenue and Expenditure Act of 1968 | 11.04% | 4.91% |
1993 | 34.0 | 35.0 | Clinton | Omnibus Budget Reconciliation Act | 10.08% | 2.75% |
Average | Real U.S. GDP YoY (%)year of year change in percent is18.94% | average percent change for S&P 500 total return is 5.70% |
Year | Old Tax Rate | New Tax Rate | President | Legislative Act | S&P 500 Total Return | Real U.S. GDP YoY (%)year of year change in percent |
---|---|---|---|---|---|---|
1964 | 52.0 | 50.0 | LBJ | Revenue Act of 1964 | 16.43% | 5.76% |
1965 | 50.0 | 48.0 | LBJ | Revenue Act of 1964 | 12.46% | 6.50% |
1970 | 52.8 | 49.2 | Nixon | Tax Reform Act of 1969 | 3.89% | 0.19% |
1971 | 49.2 | 48.0 | Nixon | Tax Reform Act of 1969 | 14.22% | 3.29% |
1979 | 48.0 | 46.0 | Carter | Revenue Act of 1978 | 18.45% | 3.17% |
1987 | 46.0 | 40.0 | Reagan | Tax Reform Act of 1986 | 5.18% | 3.46% |
1988 | 40.0 | 34.0 | Reagan | Tax Reform Act of 1986 | 16.61% | 4.18% |
2018 | 35.0 | 21.0 | Trump | Tax Cut and Jobs Act of 2017 | -4.38% | 3.00% |
Average | Real U.S. GDP YoY (%)year of year change in percent is10.36% | average percent change for S&P 500 total return is 3.69% |
Year | Old Tax Rate | New Tax Rate | President | Legislative Act | S&P 500 Total Return | Real U.S. GDP YoY (%)year of year change in percent |
---|---|---|---|---|---|---|
1970 | 27.5% | 36.5% | Nixon | Tax Reform Act of 1969 | 3.89% | 0.19% |
1976 | 36.5% | 39.9% | Ford | Tax Reform Act of 1976 | 23.81% | 5.39% |
1987 | 20.0% | 28.0% | Reagan | Tax Reform Act of 1986 | 5.18% | 3.46% |
2013 | 15.0% | 23.8% | Obama | American Taxpayer Relief Act of 2012 / Patient Protection and Affordable Care Act of 2013 | 32.39% | 1.84% |
Average | Real U.S. GDP YoY (%)year of year change in percent is16.32% | average percent change for S&P 500 total return is 2.72% |
Year | Old Tax Rate | New Tax Rate | President | Legislative Act | S&P 500 Total Return | Real U.S. GDP YoY (%)year of year change in percent |
---|---|---|---|---|---|---|
1979 | 39.9% | 28.0% | Carter | Revenue Act of 1978 | 18.45% | 3.17% |
1981 | 28.0% | 20.0% | Reagan | Economic Recovery Tax Act of 1981 | -4.88% | 2.54% |
1997 | 29.2% | 20.0% | Clinton | Taxpayer Relief Act of 1997 | 33.36% | 4.45% |
2003 | 20.0% | 15.0% | Bush Jr. | The Jobs and Growth Tax Relief Reconciliation Act of 2003 | 28.68% | 2.86% |
Average | Real U.S. GDP YoY (%)year of year change in percent is18.90% | average percent change for S&P 500 total return is 3.25% |
History suggests that the broad stock market responds more to the strength of the economy and the resulting earnings growth than it does to changes in the tax code. Will there be winners and losers? Sure, that seems likely, with the companies that benefitted the most from the 2017 tax cuts already underperforming a bit relative to companies that will not be impacted much, but it has not been dramatic.
With earnings growth likely to remain solid, but slowing, intra-year declines may become more common. However, intra-year declines often tell investors very little about annual returns. As figure 7 shows, since 2009 the S&P 500 has experienced 7 intra-year declines of over 10% and yet just two years (2015 and 2018) posted negative returns for the year. In the years that the S&P 500 experienced a double-digit decline, the average annual return come year-end was approximately 8.0%.

So getting back to our short answer…the economic expansion is likely to continue for the next several years and earnings will likely rise further as well. Given that backdrop, any pullback or correction will likely to be bought as investors are unlikely to view a sell-off as the start of a new bear market and more as a healthy consolidation after a lengthy, uninterrupted rally. That means staying focused on one’s long-term investing goals and staying invested is the approach for the average investor to take.
Market Indicators
Index | Weekly Chg (%)change in percent | YTD (%)year to date change in percent | 12 Months (%)12 month change in percent | Div. Yield (%)division yield in percent |
---|---|---|---|---|
Dow Jones | -2.2 | 13.1 | 25.7 | 1.8 |
S&P 500 | -1.7 | 18.7 | 33.5 | 1.3 |
NASDAQ | -1.6 | 17.3 | 38.4 | 0.6 |
Instrument | Weekly Chg (%)change in percent | YTD (%)year to date in percent | 12 Months (%)12 month change in percent | Level |
10-Year Treasury Yield (%) | 1.8 bps | 42.7 bps | 66 bps | 1.34% |
Gold ($/Oz.) | -2.2% | -5.8 | -8.1 | $1,787.6 |
Oil ($/bbl) | 0.6 | 43.7 | 86.9 | $69.72 |
Index | Weekly Chg (%)change in percent | YTD (%)year to date in percent | 12 Months (%) | Div. Yield (%)division yield in percent |
---|---|---|---|---|
Global | -1.2 | 14.1 | 30.4 | 1.7 |
Europe | -1.5 | 12.7 | 26.0 | 2.7 |
Japan | 3.5 | 9.0 | 25.7 | 1.9 |
Emerging Markets | -0.5 | 2.9 | 23.0 | 2.2 |
The Week Ahead
Date | Time | Event | Period | Surv(M) | Prior |
---|---|---|---|---|---|
9/14 | 6:00 | NFIB Small Business Optimism | Aug | 99.0 | 99.7 |
9/14 | 8:30 | CPI YoY | Aug | 5.3% | 5.4% |
9/14 | CPI Ex Food and Energy YoYyear over year | Aug | 4.2% | 4.3% | |
9/15 | 9:15 | Industrial Production MoMmonth over month | Aug | 0.5% | 0.9% |
9/16 | 8:30 | Retail Sales Advance MoMmonth over month | Aug | -0.8% | -1.1% |
9/16 | Inital Jobless Claims | 9/11/2021 | 323k | 310k | |
9/17 | 10:00 | U. of Mich. University of Michigan Sentiment | Sep P | 72.0 | 70.3 |