Where Do We Go From Here?

In unfortunate but typical fashion, September was a rotten performance month for the S&P 500 ending the month down over 4.5%.  I’m reminded during decreasing account values that many of us fall into the temptation of losing sight of the big picture; specifically, that the same index is positive 16.4% year to date, and despite the uncertainties in today’s geopolitical climate, we have seen these situations before.

Regarding the current market and economic conditions, here are some areas I’m encouraged about:

• The U.S. consumer is still strong as measured by the Institute for Supply Management Non-manufacturing index which registered a strong 61.7 reading in August ’21 on the heels of a record reading of 64.1 in July. Any reading above 50 denotes expansion.¹
• There are nearly twenty percent more jobs available than the current unemployment figures² when considering the labor force participation rate is at a 5-year low³.
• The Conference Board Leading Economic Index, comprised of 10 components considered to be significant indicators of future economic performance, is registering strong forecasted growth as well as projected GDP growth of “nearly 6.0%”⁴.

Here are a few things that have my attention and are worth keeping an eye on:

• Despite labor market challenges, producer confidence is currently high with smaller businesses, however, consumers are less optimistic about the future as measured by the consumer confidence index:

• The debt ceiling limit. Measures taken by U.S. Treasury to delay the inevitable exhaustion of the current ceiling will run out by mid-October.  Both parties continue to dig their heels in and are holding captive other provisions such as the continuing resolution and disaster relief.  As of the initial draft of this commentary, the stop-gap spending bill is yet to be approved but appears likely to pass and avert a government shut-down.
• The current debate of “transient” vs. long-term inflation is not yet settled.  Without question, consumers are experiencing higher costs in nearly every category of goods and services, however, supply constraints may well be the culprit.  There are dozens of cargo container ships backed up at ports along the west coast waiting to off-load precious cargo with forecasters projecting improvement by the beginning of 2022.
• Legislative risk/fiscal policy changes. There are several proposals being considered that would have a significant impact in taxation and estate tax planning.  Such proposals include significantly reducing the current federal estate tax exemption, increase capital gains rates as well as a requirement to pay taxes on unrealized capital gains, and an increase to the state and local tax (SALT) deductions.   

Some thoughts to keep us grounded in the face of uncertain financial conditions:

• Uncertainty is a facet of capital markets. The form and the basis for uncertainty vary.
• Markets fundamentally do not like uncertainty and typically react with volatility.
• The market is a forecasting tool, constantly weaving above and below “truth data” as realized econometrics are revealed. It is seemingly in a constant state of correction but ultimately reverts to the mean.  The operative and unanswerable question is how long will it take for the reversion to take place?
• Volatility can be seasonal. September and October tend to be difficult market performance months for a host of factors (futures and margin contracts expiring, government shutdown threats as the fiscal year threshold approaches).
• No one knows the next corrective phase.
• Periodic rebalancing and reviewing appropriate allocations are the best courses of action before and during periods of volatility.
• Legislative, fiscal and monetary policy changes go through cycles and this too shall pass!

As I wrote about in my last market commentary, I’m not enthused about the current market conditions and future expectations of inflation, but I’m reminded that bull markets don’t die of old age, they typically transition to corrections due to shock events or legislative/fiscal policy changes. 

It is very possible that we are entering a period of market volatility and even correction as the markets digest the potential for significant tax increases and persistent inflation.  It would appear, for now, that the market is taking a “wait and see” approach to determine the over all stimulative impacts of infrastructure spending and $3.5T “Build Back Better” legislation.  Beyond out civic duty, we cannot control the outcomes of these proposals nor the broad market response.  We can control our behavior, however.

If you have not scheduled a meeting in some time, I relish the opportunity to revisit your allocations and assess if your financial goals or life situation has changed to warrant a revision in your risk profile.

We thank-you for your continued confidence in providing you with sound financial planning and investment management services.  Please reach out anytime with questions.