October 2021 – Dan Zalipski, CFA®
The market has been adrift since Labor Day, with the major indices churning and reacting to the day-to-day headlines. The debt ceiling is suddenly an issue again, the Delta wave dragged the recovery, consumer prices are on the rise, the labor shortage persists, as does the supply chain issues outlined in our previous Market Minute. There’s a lot of negatives swirling out there that we’re all aware of. Therein lies the silver lining; when we are all worried about the same concerns, it’s likely already reflected in the market.
The political issues leaking into the market are well known. The debt ceiling deadline was pushed out several weeks, likely to come up again in the near-term. No one really believes the U.S. will default on their debt, but it is disappointing to see the economy used as a political bargaining chip. The tax increases in the spending bill are expected to pass in some form, but continue to be watered down as the Democrats negotiate among themselves. Analysts have already estimated the corporate tax rate increase would reduce 2022 corporate earnings by 5%, disappointing but far from disaster.
The Delta variant dragged on the recovery throughout the summer. Many areas reinstituted mitigations efforts, but no where near the same extent as the 2020 efforts. Regardless, some people were concerned and altered their behavior with respect to travel, retail, and consumption. Some of the hardest hit areas are now on the mend, with average case counts and hospitalizations declining. There are concerns the winter weather could bring about another wave as social activities move indoors. On the other hand, you have some experts believing the pandemic will transition to an endemic, similar to the seasonal flu. The belief is that the wall of immunity created through those that either received the vaccine or were previously infected, will dramatically reduce the virus’s ability to cause mass infection and death. With the delta wave fading, the economic rebound has a clearer path forward.
Consumer prices are on the rise. The year-over-year rebound in economic activity was enough to push up prices from their depressed 2020 levels. The supply chain and labor shortage issues are fuel on the fire. At this point, inflation is expected to continue to run higher than average as the aforementioned issues begin to resolve themselves over the next year or more. While not ideal, the economy can shoulder higher rates of inflation, especially if the consumer is strong. However, there is the lingering concern of rising home prices (and rents) will provide a new source of inflation before the supply or labor issues are resolved, adding even more fuel to the fire. We continue to monitor the situation and potential impacts to the economy.
Inflation may be running hotter than average, but it hasn’t stopped the U.S. consumer. The latest retail sales report highlighted this, advancing 0.7% for the month of September when forecasters were expecting a 0.2% decline. The average household net worth has more than doubled since the great financial crisis, while the average household’s debt payment relative to disposable income is at a 45-year low. In other words, consumers financial position remains strong. This notion was reinforced when the major U.S. banks reported earnings last week. Within the details, many of the banks pointed to high year-over-year spending growth, along with median deposit balances above pre-pandemic levels.
With many of the more recent negative drags beginning to fade, investors can begin to refocus on what comes next. Earnings season is underway, with results so far coming in better than expected. Forward looking forecast estimate continued robust growth throughout the remainder of 2021, before significantly moderating into 2022 as the surge in economic activity reverts to a more sustainable level.
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