- The run was bound to end eventually; September snapped a seven month win streak for the S&P 500, ending down 4.8%.
- Inflation, the Delta Variant, the U.S. debt ceiling, the Fed tapering its bond purchases, and the potential fallout from the default of giant Chinese developer Evergrande, were the main concerns that investors had to deal with.
- Economic data showed mixed results recently. The rise in Covid cases has definitely slowed the recovery but not all data was nearly as bad as expected. Data has shown that the consumer is still pretty resilient and willing to spend.
- Although there was early concern that Evergrande was going to be China’s Lehman Brothers moment, cooler heads prevailed as a more detailed look showed that their debt was not nearly as widespread. Plus, unlike Lehman, they actual own tangible assets that can be sold to pay off creditors. Although, it’s damage will certainly be felt in the Chinese economy without the government stepping in, it should still be relatively isolated.
- The Federal Reserve signaled this month that bond tapering may begin in November or December of this year. The dot plot showed that some Fed members see interest rates being raised at the end of 2022 and others believe it will be in 2023. The stock markets took this news rather well as the Fed Chair has done a pretty good job with preparing the markets. However, 10-year Treasuries did jump almost 20 basis points.
Why It Could Keep Going Higher
- There are still 5 million Americans that remain unemployed.
- Consumers have loads of excess savings to spend.
- Businesses have a lot of inventory to build back up.
- Additional stimulus.
- Covid cases have been dropping again in recent weeks, but the cooler weather could bring a winter surge of Covid cases. However, some epidemiological models anticipate no winter surge.
- If inflation continued at its current rate, the Fed would be forced to raise rates, which in turn is designed to slow down an over-heating economy. However, our belief is that much of the inflation we are seeing is transitory and will self-correct as supply chain dynamics return to normal.
- The U.S could run out of money by mid-October if Congress does not raise the debt ceiling.
- Personal income rose 0.2% month-over-month in August, following July’s 1.1% gain.
- Personal spending grew 0.8% in August, above estimates, and showed a significant rebound from July’s 0.1% drop.
- Inflation in August, shown by the Fed’s preferred PCE Core Index rose 0.3% month-over-month. Inflation continues to be an issue, in part emanating from the continued bottle-neck in global supply chains. This 0.3% reading was still less than feared.
- Hiring in August was less than expected with the total nonfarm payrolls increasing only 243,000.
What We Are Doing
We have continued to maintain a well-diversified allocation. We are still overweight equities and underweight fixed income but have reduced some of that overweight. We’re still investing in areas that should benefit from the world returning to normal, as well as potentially higher interest rates, such as industrials, banks and value.
We are watching the investing implications from further regulatory actions out of China closely and the potential fallout from Evergrande. During the month we swapped some of our Emerging Market exposure for Frontier Markets which has worked out well for us. With interest rates anticipated to rise over the next couple of years, we plan to maintain our underweight to investment grade fixed income and overweight to high yield and floating rate. Going forward we continue to favor high yield, preferred stocks, private debt and private real estate as a way to create income.