View/Download PDF version of Q3 Commentary (or read text below)

Stocks
U.S. stocks were modestly down, between 1-2% in the case of each of the major indices, during Q3. Although Q2 corporate earnings (reported during Q3) were very strong, the positive results were already priced in, given that equity markets rose about 15% in the first half of 2021. Moreover, supply chain challenges were noted widely in company commentary, dampening the earnings outlook for Q3 and Q4. In the present environment, demand remains extremely strong – even in the face of the Delta Variant – but companies are struggling to meet said demand as labor and material shortages abound, while global logistics are obstructed by recurring covid outbreaks in Asia. Expectations are that consumer sentiment will remain very healthy for the foreseeable future, with the unemployment rate nearly back to long-run central bank targets, from as a high as 14.8% in April 2020, so the key determinant to corporate earnings over the coming periods is the health of the global supply environment.

Bonds
The ten-year Treasury Bond ticked up a bit, from 1.44% to 1.48%, between the first and last days of the quarter; correspondingly, bond indices were basically flat in Q3. However, rate volatility tells a different story: the ten-year declined to as low as 1.19% in early August and peaked at 1.55% in late September. In turn, bonds performed negatively in the last month of Q3 as rates rose. Nonetheless, rates remain very low, that is, accommodative to economic growth, in the context of the long-term precedent, with the U.S. economy historically operating with a ten-year around 4-5%.

Inflation was high during the quarter, with CPI readings near 5%, because of the tight supply environment combined with booming consumer demand. Although economists and central bank personnel now believe inflation may be of greater permanence than previously considered, Q3 2021 could represent the inflation peak. Inflation was quite low following the Great Financial Crisis, so modestly higher and persistent price increases relative to pre-covid is not necessarily concerning. Fed Chairman, Jay Powell, indicates he will not be increasing rates until the end of 2022, and the probable future environment in which rates move higher, slowly and at a consistent pace, with inflation readings near 3%, is unlikely to be harmful to economic activity. Should inflation continue at clips near 5%, more rapid and material rate increases could be in order, which may present an obstacle to economic growth.

Outlook
Looking forward to the next 6-18 months, the most important economic issue is the status of supply. As previously noted, supply challenges are primarily deriving from 1) sheer natural resource shortages, 2) labor shortages, 3) logistics congestion resulting from covid outbreaks. It is impossible to know with certainty when global supply will resume in a fully functional, normalized way, however, generally speaking, the global economy is extraordinarily good at allocating resources such that demand is fulfilled. It may take up to a couple years for supply to resolve itself fully, during which inflation may be elevated around 3%, but as mentioned, this scenario is not a bad one for economic health. Demand should remain strong, though the U.S. labor shortage is likely to persist, challenging employers. Finally, a fiscal infrastructure bill remains up for vote, providing additional demand stimulus if passed.

by William Henderson, Vice President / Head of Investments
Last week seemed to be a tale of two markets. After starting the week off lower Monday and Tuesday, the markets came roaring back in a big way by week’s end after earnings announcements surprised to the upside and weekly unemployment claims declined much further than expected. Last week, the Dow Jones Industrial Average rose 1.6%, the S&P 500 Index increased by 1.8%, and the NASDAQ moved higher by 2.2%. Investors took advantage of the market’s 5% pullback in September and continued to pour money into equities. Last week’s rally added to an already strong year. Year-to-date, the Dow Jones Industrial Average has returned +17.0, the S&P 500 Index +20.4% and the NASDAQ +16.2%. Bond yields continued to rise as expectations of tapering of bond purchases by the Fed and higher short-term rates next year crept into fixed income traders’ plans. The 10-year U.S Treasury closed the week at 1.61%, 86 basis points higher than one year ago but still modestly below the March 2021 high of 1.74%.   

As mentioned, the economy and resultant earnings announcements continue to surprise to the upside suggesting there is still plenty of steam left in the economic recovery. A clear indication of the strength of the economy was last week’s decline in unemployment claims. See the chart below from the Federal Reserve Bank of St. Louis showing the continued precipitous drop in unemployment claims over the past year and reaching the lowest level since March 2020. 

One piece of information released last week was certainly good news for retired folks and Social Security Income recipients. According to the Social Security Administration, payments of America’s 64 million retirees will increase by 5.9% next year in the retirement benefit’s biggest cost of living adjustment (COLA) since 1982. While this “wage inflation” adjustment seems like good news to retirees, the reality is that the cost goods and services in the U.S. is increasing at recently unprecedented levels. Last week’s release of September CPI (consumer price index) showed inflation is continuing to heat up. CPI was up 5.4% year-over-year due mostly to food and energy prices, while Core CPI (ex food and energy) was up 4% year-over-year. (See chart below from Bloomberg). 

Clearly, the Fed has successfully engineered inflation (as was their plan all along). And having annual inflation well below their 2% target level, we are going to get numbers well above 2% to move the average number higher. The question for the markets and investors is: Will inflation be transitory or permanent? Generally, energy prices can be transitory as supplies eventually catch up to demand and prices adjust. However, wages and food price increases tend to stick around much longer. Large and powerful unions such as the Longshoremen and Teamsters will use the current supply chain disruptions and cargo ship back log to negotiate labor contracts more favorably for workers. Conversely, continued improvements in technology such as microchip capacity and cloud storage prices will put negative pressure on inflation and resultant prices. 

The concerns with China seem to have softly abated this week as the Chinese Central Bank (PBoC) reported that the problems with Chinese real estate developer Evergrande, are unique to the company and not endemic of the overall real estate market in the country. Additional positive news for the U.S. came around shipping rates from China. China’s official Global Times reported last week that shipping rates from China to the U.S. west coasts are down 22% over the past 4 weeks. While west coast ports are still congested, the tide may have turned on the supply of available goods which will clearly help to ease inflationary pressures.    As mentioned above, earnings announcements from companies last week surprised to the upside; specifically bank and financial stocks topped analysts’ expectations with names like Goldman Sachs showing higher revenues from trading and investment banking. The threefold pressures on economic growth: positive earnings releases, unemployment claims dropping, and softening of global supply chain disruptions all point to the potential of solid market returns for 2021. Inflation will remain a concern and COVID-19 variant cases, while lessening globally, could impact the economy going forward if we see a spike later in the year. As always, keep to your long-term financial plan and understand the markets are more efficient than investors. 

by William Henderson, Vice President / Head of Investments
The past week in this newsletter, we talked about long-term trends in the stock market and how that view will pay off much better than trying to time the market by picking highs and lows, and moving money based on those wishful targets. As you know, we are not market timers, we talk about consistent investment plans and consistent investing. These mantras have paid off well and have been, in our opinion, the correct way to invest. The financial news media, which has gained in popularity over the past 20 years needs headlines to attract readers and viewers. “If it bleeds it leads” was the old media trope; with the thinking being grab the viewer’s attention and keep them glued to the channel. Financial media follows this pattern – generally. There’s always the invisible wall of seemingly insurmountable obstacles to the markets doing “better.” We see this today everywhere in the financial headlines – inflation, supply chain disruptions, China, bond tapering, and quadrennial classic – “The Debt Ceiling Debacle.”   

Certainly, the issues above are real and deserve attention and to be addressed. Already, Congress passed a magic stop gap bill printing additional billions of dollars to keep the government running. Does anyone remember what happened the last three times the government shut down (one time each during Clinton, Obama, and Trump’s term)? Nothing! Americans went on doing their thing and getting the job done. 

Inflation? Jerome Powell succinctly told everyone he wanted inflation to average 2%. There has been a lot of concerned chatter about inflation lately with everything from food, to energy to commodities costing more; but we have been below 2% for far too many years. (See the chart below from the BLS and JP Morgan, showing CPI and Core CPI since 1971.) Only very recently have we started move above the 2% target, thereby moving the average closer to 2%. The Fed is getting what it designed – inflation will be here until it averages 2% at which point the Fed has said it will raise rates.  

The supply chain disruptions are real, and it is going to take a long time to unravel. There are something like 110 cargo ships anchored or drifting off the coast of California. Each of those ships carries about 1,000 containers. That is 110,000 truckloads of goods that need to be offloaded, loaded onto ground transportation, and moved across America. During the mandated COVID-19 lockdown, truck driver training schools shut down, which has led to a dreadful shortage of trained truckers. If you are waiting for your new dishwasher or shipment of semiconductor chips; they are likely floating off the coast of California.   

China is going to continue to be in the headlines – as you would expect for the world’s second largest economy. China is a country struggling to be a serious world power – a communist capitalist country – yet one where their President Xi Jinping is working to get reelected to a record fourth term next year. China’s actions and reactions certainly impact the global economy. 

Each of the above issues are surmountable; and the market has proven time and time again that it will move past headline grabbing events. In the short run they are common and normal pullbacks. It took nearly a full year, but the S&P 500 finally had its first 5% pullback of 2021 last week, thus ending hopes of 2021 joining 1954, 1958, 1964, 1993, 1995, and 2017 as the only to go a full calendar year without a 5% move lower. (See the chart below from Clearnomics and Valley National).   

The markets and the economy are facing short-term obstacles that deserve attention. The Fed is giving us sustained monetary policy and Congress continues to dribble fiscal stimulus, albeit with a high degree of infighting and backroom brawling. The COVID-19 variants are waning, while vaccine distribution continues to expand globally. Supply chain disruptions are impacting inflation and energy prices are spiking right in front of winter. Thankfully, the consumer has a healthy balance sheet alongside banks and Fortune 500 Corporations. The market is adjusting itself and reacting accordingly and efficiently. 

NOTE: The Numbers & “Heat Map” will return to The Weekly Commentary next week, October 19, 2021.

by William Henderson, Vice President / Head of Investments
Markets were weaker across the board last week as each major index show a negative return. Further, as noted earlier last month, September proved to be a losing month overall, keeping with stock market history. Last week, the Dow Jones Industrial Average lost -1.4%, the S&P 500 Index lost -2.2% and the NASDAQ closed -3.2% lower. Poor weekly showing by the indexes chipped away at year-to-date gains, but each major index remains solidly in the black column. Year-to-date, the Dow Jones Industrial Average has returned +13.7%, the S&P 500 Index +17.3% and the NASDAQ +13.6%. Bond yields rose last week as implications of reduced monetary stimulus, inflation concerns and the Fed’s previous announcement of bond purchase tapering by year 2021, sank in and investors reacted accordingly. The 10-year U.S Treasury closed the week at 1.49%, eight basis points higher than the previous week but still below the March 2021 high of 1.74%.   

Much has been made of the Fed’s tapering and parallels have been drawn between the 2013-2014 “Taper Tantrum,” where the Fed previously announced and subsequently followed through with a substantial tapering of bond purchases. The chart below from Bloomberg shows the 10-year U.S. Treasury during two periods of rising rates (2013-2014) and (YTD 2021). In both instances, rates rose, and volatility entered the bond markets. However, also during both periods, the stock market continued its broader bull runs.  

In our opinion, bond yields are impacted by the Fed while they maneuver through economic recessions and expansions, while the stock market is impacted by demographic trends and global macroeconomic factors such as GDP growth and population growth. This is evidenced by the chart below from YCharts and VNFA, where we show U.S. GDP and the S&P 500 Index from 1950 to present with recessions shaded. Notice the trend, from bottom left to upper right; and during all this time we had periods of bond yields falling and rising as impacted by the Federal Reserve’s monetary policy. Certainly, volatility in markets will never go away but trends are here to stay.   

Looking beyond the U.S. economy and markets, we see some economic headwinds in a few places. China, the second largest economy behind the U.S., is dealing with supply chain concerns, energy shortages and fall out from Evergrande, the world’s largest indebted real estate developer, where bond holders are still awaiting their interest payment. Inflationary concerns are shared in many parts of the world as energy prices, food prices and labor shortages compound each other putting serious headwinds in the way of a global recovery from pandemic. In the U.S., lawmakers are still debating spending bills and an increase in the federal debt limit; both of which add unneeded uncertainty to the markets. While no one expects the U.S. Government to default on its debt, the anxiety produced by pandering on both sides of the aisle in Congress does not help the markets. Both sides know the debt limit must be increased but neither wants to be held responsible for adding more to the mountain of federal debt which already exceeds $28 trillion (about $86,000 per person in the U.S.).   

It is likely that the debt limit will be increased in the eleventh hour simply because the result of not doing so would be catastrophic and neither side of Congress wants that to happen. Given how relatively low interest rates are, the cost of borrowing by the government to finance its activities also remains historically low; thereby naturally permitting greater amounts of debt. See the chart below from Bloomberg showing U.S. Government Debt limit levels and the S&P 500 Index. The market has consistently proved itself to be more efficient and forward thinking than our own congressional leaders.   

We expect the Fed to keep interest rates low even as they engage in bond purchase tapering. The economy will continue to improve while dealing with COVID-19 variants, supply chain issues, higher energy and raw material prices, and squabbling in Washington but volatility in the markets is the result. Keep focused on long-term trends and returns rather than the short-term volatility.   

by William Henderson, Vice President / Head of Investments
Although the markets started the week headed down with record drops on Monday – due to a major Chinese debt holder, real estate developer Evergrande, flirting with bankruptcy, and concerns about the week’s FOMC (Federal Open Market Committee) meeting bringing Fed tapering of bond purchases – by week’s end things were in check and the markets ended flat to slightly up. Last week, the Dow Jones Industrial Average gained +0.6%, the S&P 500 Index increased +0.5%% and the NASDAQ closed unchanged. Year-to-date, the Dow Jones Industrial Average has returned +15.3%, the S&P 500 Index +19.9% and the NASDAQ +17.3%. As mentioned, China managed to stave off a major bankruptcy and the fixed income markets digested the widely anticipated tapering of the Fed’s bond-buying stimulus program. At his press conference on Wednesday, Fed Chairman Jerome Powell indicated that the Fed may cut back its bond purchases as early as this November. Further, Powell hinted that the Fed could begin a series of interest rate hikes sometime in 2022. 

While the tapering news was expected, the fixed income markets still reacted negatively to the news. By the end of the week, the 10-year U.S. Treasury Bond reached 1.41%, eight basis points higher than the previous week, and the 10-year note’s highest level in three months (see chart below from the Federal Reserve Bank of St. Louis).  

Bond yields are still off their levels seen in March of this year when the yield on the 10-year hit 1.74%. Investors should understand that in a portfolio that holds Treasury Bonds or other fixed-income securities, such as corporate investment grade bonds, those securities are held as a risk management tool and add stability to the portfolio when risky assets such as stocks sell off. While the increase in bond yields can be attributed to Powell’s comments about tapering bond purchases, investors garnered some comfort from the fact that monetary policy in the form of lower interest rates will continue for some time into 2022.  

In economic news, we have seen a nice drop in weekly COVID-19 cases (see chart below from the CDC). 

COVID-19 case movements are a critical input in consumer confidence and consumer spending. Recall the July/August upswing in COVID-19 cases and the resulting poor reading in the August/September consumer confidence level. Two critical sectors, retail sales and auto sales saw softness in early September. With cases dropping, headwinds become tailwinds as consumer confidence and resultant consumer spending increase, especially heading into the holiday selling season. Further, as COVID-related extended employment benefits end, watch for a pickup in job growth, continued increases in wage gains, and consumers with excess savings looking for ways to spend. Some persistent headwinds remain, included increasing energy prices as we near fall/winter, limited inventory of autos and microchips and nagging supply chain disruptions. 

We are always impressed by the market’s ability to keep things in balance, much better so than an impressionable and impatient investor. Global concerns always exist whether political turmoil or bankruptcy-type risks among foreign banks and corporations. The stability and strength of the U.S. Federal Reserve helps to offset global concerns by stabilizing the largest economy in the world. Higher bond yields worry some investors, and they whisper “Taper Tantrum” but higher yields also indicate the economy is well on its way to a healthy recovery. Lastly, there’s always sector jockeying within the stock market with growth outpacing value and then vice versa or tech selling off but energy rallying. The Fed is keeping monetary stimulus policy in place well into 2022, the consumer is healthy and still eager to spend, and corporate and bank balance sheets remain the strongest we have seen in years. Headwinds – tailwinds – balance. 

by William Henderson, Vice President / Head of Investments
As predicted by the so called “market prognosticators,” September, as is typical, is shaping up to be a negative month for market returns. According to Forbes Magazine, the S&P 500 has averaged a -0.6% decline in September each year since 1945. Given how strong market returns have been thus far in 2021, a modest correction certainly seems normal and healthy for a Bull Market.  Last week, the Dow Jones Industrial Average lost -0.1%, the S&P 500 Index fell by -0.5%% and the NASDAQ lost -0.5%. As noted, the small pullback last week has done little to impact the strong year-to-date gains we have had across all three major stock market indexes. Year-to-date, the Dow Jones Industrial Average has returned +16.6%, the S&P 500 Index +19.3% and the NASDAQ +17.3%. September’s typical weakness is often attributed to institutional portfolio managers locking in their strong gains in funds before year-end thereby cementing a positive performance year. Anything could be the real reason, but we have said repeatedly that in any given Bull Market, you are going to have selloffs, pullbacks, or corrections – it is what healthy markets do and how they should behave. 

We saw some conflicting economic data last week. While consumer sentiment has recently fallen (see chart below from YCharts), retail sales for the month of August rebounded sharply to +0.7% in August 2021 from a drop of -1.8% in July 2021.  

Consumer sentiment typically predicts consumer behaviors – retail shopping – for example, so one could assume a drop in sentiment would lead to decreases in retail sales. Continued strong retail sales could soften economists’ expectations for a third-quarter slowdown in economic activity. Beyond continued concerns around COVID-19 variants and regional flare ups, crude oil, which is a raw material used in everything from gasoline to textiles to cosmetics, and plastics, has slowly crept higher in price lately. U.S. prices for Brent Crude Oil rose above $70/barrel, once again throwing inflationary concerns into in the fray. (See chart below from YCharts). 

We have a consumer with lessening confidence but shopping more, and a Federal Reserve looking for inflation but a consumer weary of higher prices for goods and services. Meanwhile, despite higher prices for crude and regional labor shortages, Wal-Mart announced they are hiring an additional 20,000 workers and Amazon announced they are hiring 125,000 workers, both before the holiday season. Again – conflicting data and news items. 

This week, the U.S. Federal Reserve will hold its two-day meeting to discuss monetary policy including opinions on interest rates and whether to continue their bond purchasing stimulus program. It has been assumed by economists that as the economy rebounds, the Fed should begin to reduce it bond purchases – so called “tapering.” Hence all the noise about a “taper tantrum,” or selloff in fixed income markets when the Fed is no longer the buyer at large. First, while the Fed is a significant buyer of bonds, other major buyers include large financial institutions, such as pension funds, endowments, mutual funds, insurance companies, banks, and individuals. Those additional buyers will remain even after the Fed reduces its purchases. That said, all the recent choppy and conflicting economic data certainly gives the Fed all the ammunition it needs to keep interest rates low and to continue their bond purchasing stimulus program. In fact, we expect the Fed to remain on hold and modestly note that eventual tapering in bond purchasing will begin before the end of 2021.   

COVID-19 variants, issues with China, supply chain disruptions and concerning crude oil prices worry us but there is always offsetting good news. Let us keep focused on the Fed and the healthy U.S. Consumers and U.S. Corporations, both of which are flush and sitting on extraordinarily strong balance sheets. These are strong forces impacting the economy and the markets.   

by William Henderson, Vice President / Head of Investments
Markets ticked downward last week, and the S&P 500 notched its first five-day losing streak since mid-February. Last week, the Dow Jones Industrial Average lost -2.4%, the S&P 500 Index fell by -1.7% and the NASDAQ, following suit, fell by -1.4%. Modest losses for the week impacted year-to-date returns but returns remain strong for all three indexes. Year-to-date, the Dow Jones Industrial Average has returned +14.6%, the S&P 500 Index +19.9% and the NASDAQ +17.8%. We are seeing global growth concerns as the COVID-19 variant is delaying a stronger reopening of travel and leisure activities by consumers. U.S. Treasury Bonds. continue to offer safety and risk protection for investors and we consistently see a flight to safety when stock markets sell off. That said, last week the 10-year U.S. Treasury Bond fell three basis points to 1.33% from the previous week’s 1.36%. The current 1.33% on the 10-year U.S. Treasury is 41 basis points lower than the 1.74% yield level hit in March of this year when the markets were predicting a strong and steady opening of the economy and hints that the Fed was going to raise rates sooner rather than later. Those concerns have been muted as modest job reports and virus concerns continue to impact the economy. It is important to keep the big picture in perspective. The U.S. economy is growing at a pace that historically would be solid by any measure. Most economists are expecting third-quarter GDP growth nearing 4% and fourth-quarter GDP growth hitting 6% or stronger. These numbers are solid despite headwinds like rising gasoline prices, supply chain disruptions due to port closures, and the latest COVID-19 “wave” rolling through the country. 

The chart below from ZipRecruiter shows the number of active online job postings. Postings remain strong and will stay that way as the unemployment continues to fall closer to the Fed’s target of 4.5% from the current 5.2% (Bureau of Labor Statistics).   

As noted above, there are headwinds impacting continued economic growth. First, supply chain disruptions are impacting corporate activity and logistical problems at U.S. ports are a major problem. See the chart below from Cornerstone Macro showing the number of anchored (meaning waiting to unload) containerships in the Ports of LA/LB.  

Snagged ships and clogged ports mean less freight moving and less economic activity. 

Second, the COVID-19 variants are modestly impacting consumer activity. An interesting and telling chart below from Cornerstone Macro shows weekly foot traffic at U.S. Parks (Disney, Six Flags, etc.) Foot traffic is certainly down from recent peaks but that can also be attributed to the summer season ending and back to school starting.   

Certainly, concerns exist, and we are seeing markets reacting to these concerns as we did last week. But the economy remains healthy and strong. Critically important are corporate earnings and profits which rose 9.2% in the second quarter according to the Bureau of Economic Analysis (BEA). When corporations are growing and earnings are growing, they hire more employees. Consumer activity makes up the bulk of the U.S. economy. Pfizer is close to getting FDA approval for its COVID-19 vaccine for children aged 5-11. Throw in a cooperative Federal Reserve and we have the trifecta for continued economic recovery: healthy corporate activity leading to more jobs, wider distribution of the COVID-19 vaccine and low interest rates well into 2022. Stay focused on the bigger picture, avoid the noise, and remain committed to your long-term financial objectives. 

by William Henderson, Vice President / Head of Investments
In front of a Labor Day holiday weekend, stock markets closed the week with mixed returns and a quiet Friday trading session. Last week, the Dow Jones Industrial Average lost -0.2%, the S&P 500 Index gained +0.6% and the NASDAQ gained +1.6%. Regardless of the modest mixed results, 2021 year-to-date returns remain solidly in the black column with double-digit returns across all major indexes. Year-to-date, the Dow Jones Industrial Average has returned +17.1%, the S&P 500 Index +22.0% and the NASDAQ +19.8%. A weaker than expected jobs report on Friday suggested the Fed may remain on hold for rate hikes; patiently waiting for the unemployment rate to reach the targeted 4.5%. Regardless of the weaker economic news, U.S. Treasury Bonds sold off by the end of the week as thin trading on Wall Street continued to believe the Fed will taper its bond purchases by year end. The yield on the 10-year U.S. Treasury rose five basis points to 1.36% from 1.31% the previous week. The current 1.36% on the 10-Year U.S. Treasury is 38 basis points lower than the 1.74% yield level hit in March of this year.  

As mentioned above, the August employment report released on Friday showed a recovery hitting a small bump in the road. Monthly job gains totaled 235,000, significantly below economist’s expectations and a drop of 800,000 from July report. Renewed concerns around the Delta-variant of COVID-19 pointedly slowed job growth in the leisure and hospitality sector, emphasizing the results of resurfacing pandemic restrictions. (See the chart below from Bloomberg showing monthly payrolls and the unemployment rate.) 

While the jobs report was weaker than expected, it is unlikely that this is the new direction of the economic recovery. A lot of noise could have been in that number including, summer job cessations due to students returning to school. Last weekend also marked the end of the Pandemic Unemployment Assistance, which in theory, should force many people back to a labor force starving for employees in many sectors and regions of the U.S. August’s weak labor number certainly gives the Fed some cover for delaying any bond purchase tapering and any thoughts of raising rates. The general direction of labor and the Fed’s position should keep the economic recovery on track. 

Cornerstone Macro released a quick study on stock market sector rotation trading, i.e., growth to value or vice versa trades. “Despite all the machinations and zigging and zagging and rotation talk, the long-term winners remain in place,” the study noted. “From the March 2009 Financial Crisis low to present, only two Sectors have outperformed the market, Technology and Consumer Discretionary. One has paced the market – Health Care – while all the others have lagged.” From 2009 – 2021, Information Technology has returned +1106%, Consumer Discretionary +766% and Healthcare +415%, all other sectors underperformed the S&P 500 Index at +402%. The point of their study was simply to show that long-term investing and a long-term commitment is a winning “trade.” Further, an emphasis on investing in sectors which favor growth (technology) and demographic trends like aging western economies (health care) has historically proven to be additive to that trade.

We remain steadfast in our opinion that a dedication to long-term investing and solid financial planning rather than gimmicks like “market timing” or “sector rotation trading” is the only winning trade for investors. 

by William Henderson, Vice President / Head of Investments
Fed Chairman Jay Powell gave the markets what they expected during his virtual Jackson Hole speech. He offered calming words around the effect of modest tapering of bond purchases by year-end and no rate hikes until unemployment is at or near the 4.5% target and average inflation hits 2%. Those few words gave solace to the markets and we saw a nice rally at the end of the week. Last week, the Dow Jones Industrial Average gained +1%, the S&P 500 Index gained +1.5% and the tech-heavy NASDAQ gained a juicy +2.8%. Strong weekly gains added to already strong year-to-date gains, shaping 2021 into quite a year for stock market returns. Year-to-date, the Dow Jones Industrial Average has returned +17.3%, the S&P 500 Index +21.2% and the NASDAQ +17.9%. The Fed’s dovish tone during Powell’s speech kept Treasury Bonds from drastically selling off on the bond tapering news. The yield on the 10-year U.S. Treasury rose five basis points to 1.31% from 1.26% the previous week. The current rate is 43 basis points lower than the 1.74% yield level hit in March of this year. 

Low Treasury Bond yields impact corporate borrowing levels and mortgage rates, both of which have positive implications on the overall economy. Corporations can borrow at historically low levels and low mortgage rates also continue to boost the U.S. housing market. (See the two charts below, both from the Federal Reserve Bank of St. Louis). The first chart shows the 30-year fixed rate mortgage average in the United States and the second, by Moody’s, shows corporate bond yields relative to the 10-year Treasury (commonly called the “spread” to treasuries). Both charts are at or near record low levels. 

Several issues remain solidly behind the markets and the economy. First, as we have shown many times, the consumer is flush with cash (from stimulus money, decreased spending over the past year and increased savings). Second, the banking system is in great shape to fuel an already expanding economy. Two charts by Cornerstone Macro show U.S. banks willingness to make consumer loans and Commercial and Industrial Loans (C&I) at or near record levels in both cases. Low rates and banks’ strong willingness to lend make a good partnership. 

And third, as mentioned above, Treasury yields remain low, allowing mortgage rates to stay low and corporations to borrow at near record low levels. All three issues point to the continuation of a healthy growing economy and a strong finish to 2021.   

It would not be prudent to speak only in terms of positive indicators. Truthfully, each week we scour the headlines searching for headwinds and pockets of negativity. Concerns about unrest in Afghanistan and elsewhere across the globe, supply chain disruptions, and uncertainty around COVID-19 variants seem to always be bubbling just under the surface. Remember, every healthy bull market has frequent selloffs (sometimes by 5% or more), so it is important to realize that markets go down and markets go up; we just hope that in the end, there are more ups than downs. Like a broken record going around a turntable (are we dating ourselves?), we repeat: a long-term outlook and sound financial plan is a solid recipe for success. Pay attention to what’s behind the growth story and the solid economic foundation the Fed has built. 

by William Henderson, Vice President / Head of Investments
U.S. stocks finished last week modestly down across the board. The Dow Jones Industrial Average fell -1.1%, the S&P 500 Index lost -0.6%, and the NASDAQ fell by -0.7%. The modest losses for the week did not take much from full year 2021 returns, which remain healthy across all three indexes. Year-to-date, the Dow Jones Industrial Average has returned +16.1%, the S&P 500 Index +19.4% and the NASDAQ +14.7%. Treasury bonds changed very little last week with the yield on the 10-year U.S. Treasury dropping two basis points to 1.26% from 1.28% the previous week. 1.26% on the 10-year U.S. Treasury is a full 48 basis points lower than the 1.74% yield level hit in March of this year. Further, traders and equity markets certainly were caught off guard last week when the FOMC meeting minutes were released and showed that the Central Bank was considering a “tapering” of bond purchases. This had to have been an “Emperor Has No Clothes” moment as the worst kept secret on Wall Street was revealed. Everyone, everywhere expects the Fed to taper its bond purchases, so why did the markets sell off?   

As we planned this week’s market commentary, it was agreed that we would not follow the herd and mention the “Taper Tantrum of 2013,” however, it seems we failed. This event refers to the 2013 modest sell off in bonds resulting from the Fed announcement that it would finally reduce bond purchases it had been making since 2008 because of the Great Financial Crisis. Looking at the chart below from the Federal Reserve Bank of St. Louis, the “event” of 2013 looks more like a buying opportunity in bonds rather than a blood bath for bond traders as the 10-year U.S. Treasury hit 3.04% at the end of 2013.
 

The point is that everyone knew in 2013 that the Fed needed to slow its bond purchases and allow the markets to return to somewhat normal trading patterns. Just like 2021 – everyone knows the Fed must slow its purchases. So, again, why did the markets sell off on last week’s news from the Fed meeting minutes? The markets are most likely seeing the gradual end to the massive monetary stimulus that the Fed has provided since March of 2020 and that simply removes a comfortable layer of protection and adds an unsettling layer of uncertainty. 

There are two opposing thoughts: First, actions by the Fed to reduce its bond purchases thereby starting to remove monetary stimulus, shows the economy is well on its way to a solid recovery. This is healthy news and should eventually result in strong market performance. Second and more worrisome was the Fed’s last-minute change to its annual symposium in Jackson Hole, Wyoming, to a virtual event rather than the previously planned in person event. The Fed’s decision to cancel this live event is certainly indicative of wider implications from the spiking in cases of delta-variant of COVID-19 and signs of overall weakness in economic activity. Data released from the Transportation Security Administration last Friday showed a slowdown in travel, with the number of people passing through TSA checkpoints down 10% from a mid-July high. In our opinion, one could certainly brush off this drop in travel as typical of the summer travel season ending and the “back to school” season starting. Either way, it is information and activity that the market must digest and then react to in one way or another. 

Just like we need things to write about each week, so do the business news channels needs things to talk about every day all day. Economic noise and information are widely available and overly celebrated. We like to focus on long-term trends like the 50-year growing GDP of the United States, favorable demographic trends in the U.S. compared to other developed countries, and finally, long-term performance of stock and bond markets. Keep focused on your investment and ignore the noise.