Although September brought an early Halloween scare to the market with the S&P 500 -5% for the month, stocks still were flat for the quarter and rose +15% (excluding dividends) for the first nine months of 2021. Not too shabby particularly since we had to shake off the collapse of Evergrande, China’s largest residential real estate developer, in September that some bears thought could be a “Lehman moment” referring to the 2008 demise of the American investment bank that was key to the Financial Crisis.
An exogenous event no matter how shocking like Evergrande’s implosion isn’t what makes some savvy U.S. investors anxious. The Boogeyman is inflation and the potential increase in interest rates that will accompany it if it lingers. For the first time, Fed Chairman Jay Powell acknowledged this week in his testimony before Congress that inflation may be more menacing and stickier than he and other bulls had admitted. For over a year, the managers of many companies have complained about inflation’s impact on their businesses. Case in point: Last quarter (announced on September 21), FedEx badly lagged the Wall Street analysts’ consensus earnings forecast because it had $450 million in extra costs year-to-year due to its labor shortage. Frustrated workers don’t come cheap if they come at all! If FedEx’s wage-price spiral becomes commonplace, we may not be able to put the inflation genie back in the bottle. Of course, we have a mismatch between COVID supply and post-pandemic demand, but this issue is more complex than that.
Even before inflation spiked, the Fed was wrestling with when they should taper their bond purchases followed by when they should lift the Fed Funds baseline rate. They pulled these monetary policy levers in the spring of 2020 when COVID first threatened us. Easy monetary policy isn’t supposed to be forever, or is it? Interestingly, US rates have been falling since the summer of 1981 when America’s “risk-free” rate, or the yield on the 10-year US Treasury note, peaked at 15.8%. To put this perspective, it’s 1.5% today although this is up from its 0.5% August 2020 COVID trough. Sure, inflation is a factor that the Fed is considering as it looks to potentially tighten monetary policy, but that’s not the only thing on its plate. The Fed long has had a dual mandate for stable prices and maximum employment. Although we can’t get some Americans off their couches and back to work, there still are millions of disenchanted unemployed.
I may sound like a broken record but the juxtaposition between inflation and rates is all that matters. This dynamic is more important than how good one is at picking securities. For now, I’m sticking with U.S. equities despite my concerns although I’m increasingly intrigued by other developed markets stocks. Until the yield on the 10-year US Treasury note eclipses what I can easily earn on my favorite Dividends Model stocks, which is 2%+, I’m going to reduce equity risk by investing in these names. When I’ve the opportunity for more aggressive clients, I’ll add my Technology Model stocks. Nonetheless, there’s no reason to rush into anything. Earnings “season” is coming up. That’s when companies en masse will confess any sins for the September quarter. I think that you’ll hear much more whining about inflation like FedEx has done. Again, I believe that inflation is more pervasive so more worrying than others seem to feel.
*Statistical Data from Yahoo! Finance
Investment Advisory Services are offered through Independent Solutions Wealth Management, LLC, an SEC Registered Investment Adviser. All opinions expressed by Paul Meeks are solely Meeks’ opinions and do not reflect the opinions of Independent Solutions Wealth Management, LLC (“ISWM”). You should not treat any opinion expressed by Meeks as a specific inducement to make a particular investment or follow a particular strategy, but only as an expression of his opinion for educational purposes only and does not constitute investment, legal or tax advice, an offer to buy or sell any security or insurance product; or an endorsement of any third party or such third party’s views. Meeks opinions are based upon information he considers reliable, but neither ISWM nor its affiliates and/or subsidiaries warrant its completeness or accuracy, and it should not be relied upon as such. Meeks, ISWM, its affiliates, and/or subsidiaries are not under any obligation to update or correct any information provided on this website. Meeks’s statements and opinions are subject to change without notice. No part of Meeks compensation from ISWM is related to the specific opinions he expresses. Past performance is not indicative of future results. Neither Meeks nor ISWM guarantees any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned may not be suitable for you. This material does not take into account your particular investment objectives, financial situation, or needs and is not intended as recommendations appropriate for you. Before acting on information, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from an investment adviser.
Investment Committee Member Paul Meeks was on CNBC’s Squawk on the Street to discuss his broad take on equity markets and government impact on certain stocks. Watch here!
Paul Meeks was in a Barron’s article regarding Arm’s IPO price and gives his thoughts on the nature of the valuation. Read here for details!
Paul Meeks was featured in a CNBC article explaining why he may buy certain tech stocks after the hype has ran its course. Read the article for details!