Oct 14 2021
October 14, 2021

2021 – 3rd Quarter Commentary

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 The market faced the start of the third quarter with high expectations and ended with a flip from growth to value.  The good news that drove the market through the first half of 2021 simply stopped coming, replaced by concern over the $3.5 trillion dollar tax and spend plan the democrats proposed, supply chain issues, labor shortages, surging inflation and Biden administration slip ups.

Covid continued to have its impact on the market. The virus appeared to begin declining in much of the US as we moved through the month of September.  The number of covid cases did begin to rise in the northeastern states as the quarter ended. 

The majority of stocks ended the quarter below the 50-day moving average.  Half of the NASDAQ was down more than 20% and half of the S&P stocks were down more than 10%.

The federal reserve announced in September that interest rates would stay at near zero until 2023.  But the FED did indicate it would begin tapering in November.  Tapering would mean the FED would slowly reduce the dollars spent each month on buying US treasury and mortgage bonds.  The bond buying is meant to inject liquidity into the market and hold down interest rates.  The concerning announcement was the FED chairman’s concession that transitory inflation was more persistent than expected.  At the beginning of the year the chairman expressed surprise that inflation was a problem.  The FED does have a history of always being wrong.

The US 10-year treasury is considered the benchmark indicator of the direction of interest rates.  The 10-year begin to edge above 1.5% at the quarter ended.  Rising rates are typically seen as a negative for the tech stocks.  Inflation still makes the true return from the bond market a negative number.

Inflation has become a real problem and will become a bigger problem.  If you eat food, buy clothing, run your car on gasoline, heat your home with natural gas, buy a used car, buy a home, or try to hire an employee you understand prices are escalating. 

Global energy shortages are not only increasing the cost of fuel to consumers but are interrupting manufacturing which puts added crimp in the global supply chain.  The decision to curtail fossil fuel production in the forced march toward green energy has led to service stations closing in parts of Europe and rolling blackouts in China. Natural gas shortages in the US are becoming a problem and the heating season has not yet arrived. President Biden, who slashed gas and oil production in the US, resorted to asking OPEC to increase its production.  OPEC has not done so.  Investment in fossil-fuel production was slashed around  the world to reach zero carbon emissions by 2050. 

Christmas shoppers are being encouraged to shop early due to supply chain issues.  Strong consumer demand and a shortage of product leads to more inflation.  Consider the housing market.

Incomes for Americans who are choosing to be employed are increasing, and so is spending. Holiday spending projections are strong and there is a bump in travel reservations for November and December. 

Unemployment persists despite a record number of jobs being available across the US.  Unemployment numbers could go higher as vaccine mandates require workers to get the shot or lose their jobs. 

The increasing cost of labor is forcing some businesses to reduce the number or days they are open or to shut their doors altogether. Rising wages are not transitory and show that inflation will continue longer than the FED’s projection. 

As mentioned, there as a lack of good news. For the past year, our portfolios have held near a 2% cash position.  Cash is now near 15%. Large cap growth and tech stock positions have been reduced to take gains off the table.  Emerging market positions have been sold to reduce exposure to Chinese stocks. Commodities, real estate and financials have been buffed up to hedge against inflation. 

In case you did not get the hint, inflation will become a bigger problem. Supply chain and labor costs are given much of the blame. But the massive spending by the US congress and the FED’s free money stance are making the problem much worse. The FED has tried to keep interest rates low to stimulate the economy. That time has long passed. The FED would also like to see interest rates low to allow the US government the repay its debt.  Watch to see if Democrats can push through their huge spending plan. The proposed high taxes on people who are choosing to work will stifle growth.

Fred Lee, FP ®