What a difference a month can make? There was increased volatility and tension this past month as September saw stock prices fall 4.6% (as measured by the S&P 500), the first substantial drop since the March 2020 onset of the virus. Investors had been lulled by seven successive months of positive returns even though September is historically a challenging month for stocks. According to Barron’s, the average September return for the S&P 500 has been a loss of 0.99%, dating back to 1928. While the better known calamities (the great crash of 1929, Black Monday in 1987) both took place in October, September is the more likely month for stocks to underperform. Even still, stock prices are up an impressive 15.9% year to date.
On the margin, several things changed during the month that may well influence stock prices through the end of the year. One was the potential insolvency of Evergrande, the Chinese real estate development company inflamed by the media referring to it as the next “Lehmann moment.” Late in the month, interest rates inflected upward, amplifying fears of “sticky” inflation even though supply chain and labor constraints are amply well known. We also saw a curious positive correlation between stocks and bonds, which has temporarily eliminated the important diversifying effect of owning bonds in a portfolio.
Washington DC once again took center stage with the looming government shut down and concerns over the debt ceiling. In my opinion there will not be a default. It is equally unlikely we will see the birth of a $1 trillion coin to mop up excess borrowing. I think President Biden’s $3.5 trillion Build Back Better plan will have to be rationalized as Washington is divisive. The attention around DC is not necessarily investible, unless of course you are an “insider” which we are not, and it is extremely hard to make bets on congressional outcomes.
In better news, more people are getting vaccinated and many are lining up for the booster, at least in the US. According to the Centers for Disease Control and prevention, 77% of American adults have at least one shot; we may indeed achieve some level of herd immunity. It seems that the Delta variant that has been sweeping the globe spurred more people to get vaccinated. The economy, the workplace and our social patterns are adapting to a post pandemic “normal”. One area where this is not the case is the political sphere, where efforts to politicize the handling of the virus for political gain over public safety are shameful.
While some effects of the pandemic may be winding down, several aspects are not. We should expect the supply disruptions to continue on-and-off for some time; we do not now know how to put a time frame around this. Low inventory levels in certain industries is also an issue. The same goes for the bouts of inflated prices that keep appearing like a whack-a-mole. Surges in prices for copper, lumber and coal have created noise and confusion and the apparent tight job market has improved wages, something long overdue. Some of these disruptions will likely put some downward pressure on corporate earnings, but I doubt there will be any sort of long-term effect.
My view that some additional cash makes sense at this point has not changed. This is not with a mind to opportunistically buy if the market suddenly drops, but to allow you to sustain a longer, more challenging period when “sitting tight” is the best course of action. Bond yields remain historically low and quality stocks remain the best game in town. We have adjusted our stock models to more appropriately align with the value and dividend factors driving returns.
As we head into the final quarter of 2021, I remain optimistic that our research and analysis have positioned your portfolios well. I expect there to be strong earnings into 2022, and the effects of the virus on the global economy to abate. We are continually revising our view and modifying our holdings with the evolving landscape. Please feel free to reach out if you would like to discuss this with me or our team. We are also more than happy to address any tax or financial planning concerns you may have. Take good care.
Bruce Hotaling, CFA
The views and opinions stated herein are those of Bruce Hotaling, are of this date, and are subject to change without notice. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Investments are subject to market risk, including the possibility of loss of principal. Past performance does not guarantee future results. The S & P500 is an unmanaged index of 500 widely held stocks. Investors cannot invest directly in an index. The PE ratio (price/earnings) is a common measure of relative stock valuation.