Quarterly Letter - October 2021
by Peter J. Connors, CFA, on October 01, 2021
In a brief year and a half, the pandemic’s economic recovery has transitioned from an energetic youthfulness to an awkward adolescence. Reflecting that youthful spirit, the S&P 500® Index posted above-average returns between 6% and 21% for the past five consecutive quarters and real Gross Domestic Product grew in the second quarter to 6.7% annualized. But now, growing pains of adolescence are evident as we move from recovery to a more normal expansionary phase with growth likely somewhat below recent levels, accompanied by more market volatility. And if adolescense suggests potential, the good news is that we remain in double-digit territory for the calendar year 2021 with the S&P 500®, Dow Jones Industrial Average and Russell 2000® posting gains of 15.9%, 12.1% and 12.4%, respectively. However, several metrics, including consumer spending, housing, the labor market, and business sentiment are signaling slower growth during the quarter. This is not surprising when car dealerships have few cars to sell, consumer products that we have come to depend on remain afloat in cargo ships at sea, and this supply chain disruption has affected everyone in some real way.
And the major equity indices of the S&P 500® Index, DJIA, and the Russell 2000® Index all downshifted during the quarter returning 0.6%, -1.5% and -4.4%, respectively. In addition, seasonal market performance during September and October has typically been lackluster. The Dow Jones Industrial Average has ended the September/October period higher only 48% of the time, with an average return of negative 0.7% since 1900.
Source: Charles Schwab, SentimenTrader, 1900 – 2020. Table reflects performance achieved by holding the DJIA every year, but only during the indicated starting and ending months. Indexes are unmanaged, do not incur management fees, costs or expenses and cannot be invested in directly. Past performance is no guarantee of future results.
Other uncertainties include COVID-19 headwinds, tax and regulatory risks from legislative plans, and corporate earnings stability. Political risks regarding the debt ceiling are the highest in a decade. Markets may begin to assess the expected impacts of increasing the corporate tax rate and the minimum tax of U.S. companies’ foreign income. Let’s not forget the Federal Reserve and taper talk. It has communicated it will begin tapering bond purchases associated with quantitative easing in the fourth quarter, but markets do not know when the Fed will start to scale back purchases or the pace at which they will be reduced. If the Fed starts to taper sooner than expected, or the pace of reductions is faster than the market has currently priced in, it may cause additional volatility and opportunity in markets.
Like adolescents navigating their journeys, markets can enter into adulthood as consumers remain exceptionally well positioned, in aggregate, with wage and salary earnings above pre-pandemic levels and over $2 trillion in savings accumulated during the pandemic fueling pent-up demand. This could provide strength to the economy and the markets in the months ahead. We continue to focus on quality and stock selection to capture opportunities in those companies with solid balance sheets and good underlying fundamentals.
Stay safe and enjoy your fall.
Peter J. Connors, CFA
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