Something is a-Brewin'
“Winds in the east, mist coming in, like somethin’ is brewin’ bout to begin. Can’t put my finger on what lies in store, but I fear what’s to happen all happened before.”
Who doesn’t love Mary Poppins? The wisdom expressed in that iconic children’s story is timeless.
Author P.L. Travers appears to have been well versed in the theories of Adam Smith. When she writes: “it has all happened before,” she aptly describes the business cycle.
Economies grow, and they contract. It is an immutable law of economics, similar to physics and gravity.
Since the 1930s, governments and central banks have done their best to try and counteract the business cycle in some of the grandest human endeavors ever attempted. To date, the business cycle persists.
As financial advisors, these government interventions make our job challenging. We have to adapt to changing circumstances constantly. How anyone decides to go it alone in such an environment is beyond me, but I digress.
What exactly is going on today? To find out, let’s look at the last quarter to see how markets are faring. First, let’s start with a quick overview of the forces impacting the market over the previous few months.
The return of COVID worries sparked by the Delta variant significantly influenced economic activity in the third quarter. People continued to get sick, and it impacted consumer behavior.
After a year of being locked down, consumers were ready to get back to doing what American consumers do best: spending. That’s a good thing, but with the rise in the Delta variant, consumer spending fell short of expectations, especially in the travel and leisure industry.
Another backdrop to this past quarter is the surprising shortage of labor. Businesses still struggle to fill open positions with workers.
The difficulty of finding labor is a headline story and has become a headwind for the economy. Various theories exist as to why worker shortages have emerged. I have my own that I wrote about in our third quarter client letter HERE.
Because of the labor shortage, we also see supply chain bottlenecks throughout the economy. Goods are not being produced at the level needed, and when they are, getting them to the stores has become a real problem.
When you have both a labor shortage and a supply constraint, you will sow inflation. Inflation, rightly so, spooks investors, and the debate as to whether higher current inflation is temporary or structural is critical in assessing where the market may be heading.
In the end, the third quarter gave us a stock market that drifted for the first two months before falling broadly in September. Not a surprise, given what was going on.
According to Bloomberg, the Dow Jones Industrial Average lost 1.5% for the three months ending September 30, 2021. The S&P 500 was up 0.6%, and the technology-laden Nasdaq 100 was up 1.1%.
As one might expect during uncertain times, defensive sectors performed the best. According to Bloomberg, with an uptick in bond yields, financials were the best performing sector in the quarter, with a gain of 4.4% in the period.
Technology was the second leading sector with a gain of 2.8%. Within technology, we saw strength in the semiconductor business. Shortages of semiconductors appear to be providing those companies with a multi-year path of recovery.
The healthcare space added 1.5% during the quarter, benefiting from the roll-out of vaccines and the increase in mandates. Oil price supply shortages resulted in a spike in crude during the period. Energy stocks added 1.2%.
On the downside, industrial stocks lost 2.8%. Materials slipped 1.9% on worries about China after the default scare of real estate giant, Evergrande.
When looking at all that is going on, we feel something is indeed brewing.
Inflation appears to be more than transitory.
COVID is still around, but I’m not worried about it as we are doing a much better job managing it, despite coverage that claims otherwise.
The current administration is fighting hard for its spending plans on the fiscal front, including a significant tax increase. That’s a considerable risk for the market should it come to pass.
On the monetary side, some central bankers are in a hurry to combat inflation. Messaging from the Federal Reserve suggests that it will be stepping down its bond-buying program soon. Rising rates would be a decided negative for stocks, but we feel it's a medicine that would be good for the overall health of the economy and markets.
All of this adds up to increased risk. The key to navigating this market is to have a sound financial plan. It’s the basis from which we assess how to address the changing market for each of our clients.
Can we help you navigate current conditions to help you reach your goals and objectives? I’m pretty sure we can.
Give me a call, and let’s start discussing your situation today.