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.