Market Monitor: Political Chicken?
September had a case of the September Scaries – September has a reputation for being among the year’s worst months. According to S&P Global, the month averages a decline of .99% and is negative 53.8% of the time. However, this one hit a little harder than average for investors, with a 4.76% decline was that was the worst since March 2020.
Despite some positive data releases, the combination of the ongoing Delta surge, the likelihood of an earlier rate increase, and a game of political chicken spooked markets. The switch to risk-off meant that 10-year Treasuries ended the month above 1.50% for the first time since June.
Let’s Look at Some Highlights
INFLATION CAME IN UNDER EXPECTATIONS
Inflation seems to be near the top of everyone’s mind recently. Prices rose 5.3% from August 2020 to August 2021. Believe it or not, that lofty increase was actually below expectations and lower than July’s 5.4% increase.
The Federal Reserve has remained pretty consistent in its view that the inflation we have seen this year is “transitory,” expecting it to dip back down to around 2.2% next year. The Fed believes the current supply chain issues, shipping delays and semi-conductor shortages, will ease, and inflation will follow suit. If you’ve looked at a new (or used) car recently, you’ve seen how much the chip shortage has impacted those prices. We would agree with the Fed that portion is probably transitory.
We do worry that other areas may not be. Housing and rental rates tend to be sticky increases. Higher tax and labor costs (due to a shortage of workers) would seemingly be passed on to consumers through increased prices.
From a personal finance perspective, inflation is obviously important. How much stuff can my money buy me today vs. how much can it buy me next year is essential when planning for the future. In the investment world, inflation will also impact the Fed’s actions. Inflation easing next year would likely keep the Fed in an expansive monetary policy for longer, which is positive for markets. Inflation staying high would likely cause the Fed to tighten conditions quicker than they are currently indicating, which would be a negative.
POLITICIANS PLAY CHICKEN
On July 31, 2021, the most recent suspension of the debt limit ended. Since then, Janet Yellen and the Treasury have been using “Extraordinary” measures to keep the government going, which she testified that they expected to run out of money on October 18th, 2021.
The debt limit is the total amount of money the United States can borrow to meet its existing obligations, including Social Security and Medicare. The keyword in that definition is “existing.” This isn’t Congress authorizing new spending towards new projects; it’s them authorizing to pay for existing expenses. The spending bill is separate and also obviously an issue. Since the US spends more than it takes in, suspending the debt limit enables the Treasury to pay its bills and avoid default.
The alarm bells were since July, causing angst in the market. Congress did temporarily suspend the debt limit, but only for two months. It wasn’t surprising that when Congress agreed to increase the debt limit, the markets had a great day. Unfortunately, with the can only being kicked for 2 months, we will likely see market jitters again shortly.
Markets
Through 10/12/2021:
- The S&P 500 is up 17.13% year to date (green line).
- The MSCI EAFE international index is up 7.62% year to date (blue line).
- The Barclays US Aggregate Bond Index is down 1.84% (orange line).
Source: Kwanti
The Smart Investor
As would be expected, given the continuing drama around both the infrastructure and reconciliation bill, coupled with the potential for tax increases and worries about the debt ceiling, volatility returned in September and has the potential to persist for the next few months. Don’t let recent volatility alter your long-term plans, Markets could quickly even out, with the passage of legislation before Congress and fourth-quarter earnings season ramping up.
Reviewing portfolio assets to ensure income needs are met and that you can withstand potential volatility always makes sense. As we get towards the end of the year, looking at your portfolio with an eye on taxes and income levels may yield some opportunities to strategically sell and realize losses that can offset some gains from this (hopefully) strong year overall.
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. The Bloomberg Barclays US Aggregate Bond Index is a broad base, market capitalization-weighted bond market index representing intermediate-term investment-grade bonds traded in the United States and is used for measuring the performance of the US bond market. Indexes are unmanaged and do not incur management fees, costs, or expenses. It is not possible to invest directly in an index. The MSCI EAFE Index is a stock market index that is designed to measure the equity market performance of developed markets outside of the U.S. & Canada. It is maintained by MSCI Inc., a provider of investment decision support tools; the EAFE acronym stands for Europe, Australasia and Far East.
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