3rd Quarter 2021 Commentary

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Dec 012021

October 15, 2021

This chart from Morningstar says a lot about the last three months, and not just the stock market! The 4th of July came with much hope and enthusiasm for a return to a more normal life after 15 months of COVID induced pandemic challenges of one kind or another. But then ‘stuff’ happened.

Obviously, it’s just a reflection of Morningstar’s U.S. Market Index’s return for the quarter ending with a gain of 0.3%. For the last twelve months, the gain was over 31%, which is clearly outstanding. The chart shows the nineteen new market highs for the quarter. As well as the sharp drop and recovery in July when the “Delta” variant first made headlines. Then the strong performance continued up to September. Throughout September a variety of concerns weighed on the economy. These ranged from increased COVID pressure, ongoing supply chain/logistical issues, employment/staffing challenges, public finance fiscal management issues, etc., etc.

Fortunately, I think we are getting much closer to gaining the upper hand on COVID. We now have multiple viable testing options. Especially with the availability of rapid tests, which allow many people to be tested quickly and with timely results. There are now multiple vaccination options, which seem to be highly effective at reducing the likelihood of hospitalization and death. In addition, to the fairly expensive monoclonal antibody treatment, it looks like we are on the verge of having something as simple as a pill to treat early-stage infections. Overall, and in spite of some missteps, I would have to say that science and medicine have made stunning progress in the last 18 months or so.

Unfortunately, we [the world] has a long way to go with regard to the human and supply chain related economic issues.

In broad strokes it may be easy to understand how complicated and involved logistics are, but in the last 18 months we’ve all learned a hard lesson about how interdependent everything is. At this point, it is clear that getting the supply chain back to normal will be a long and perhaps, bumpy process.

For a variety of reasons people have dropped out of the labor pool so labor is going to be an ongoing issue. For women, it could be finding adequate/affordable childcare, but for early retirees, getting them back in the workforce may be another matter.

These issues will impact inflation, both actual and expected. Although the resolution of the supply chain issues may reduce some price pressure, increasing labor costs may result in higher imbedded costs if they are not offset by productivity gains.

As usual, there are a whole slew of other factors that will affect the economy going forward. Perhaps, the most recent is the elevated level of political gamesmanship being played out over the budget and debt limit.

Nonetheless, the thing to remember is that overall, the economy is actually doing quite well!

Here’s hoping for a good finish for what has been a very good year.

2021 Second Quarter Commentary

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Jul 192021

It’s hard to believe but we’re halfway through 2021 already!

We’ve made it through fireworks, flash floods, hot weather, and whatever else has come our way over the last few months.

It appears that COCID vaccines can control the worst impacts of the virus. For many, the Fourth of July Weekend was a return to some much-needed normalcy.

The S&P 500 was up 14.4% in the first half of 2021, which I understand to be one of its strongest first halves.

Although there may be valid concerns about the pace of the stock markets climb, corporate earnings have been on a similar pace, which makes the current valuations sustainable, at least for now.

But not to worry, the market has found plenty of things to put on its worry list:

Inflation – The CPI is up much more than we’re used to on a year over year basis. But is this transitory, due to supply chain issues or other short-term factors? For now, the smart money seems to be suggesting it will be around 3% or so for the rest of 2021 then work back towards 2% next year.

Interest Rates – They’ve had a relatively large upward move since the beginning of the year but have slipped in the last few weeks. As an example, using the ten-year US Treasury Note, it’s yield started the year just under 1%, got as high as about 1.75%, and now its trading around 1.3%. {I know – on an absolute the basis this doesn’t amount to much, but on a relative basis, these are big moves}

Fed Policy – Another factor is when will the Fed end its current bond buying program. For the most part, the market wants it to be later, but there could be pressure for sooner if inflation doesn’t settle down.

Employment – Right now employees have the upper hand as employers are scrambling to re-staff their businesses. It is my understanding that employees are feeling so empowered that the “quit-rate” is at a
2nd Quarter 2021 remarkably elevated level. The availability of childcare is another factor that may be an ongoing issue at least until school begins again this fall and the pressure on day care eases.

International Pandemic Situation – The ‘Delta Variant” seems to be impacting both developed and developing countries especially those that have had limited success vaccinating their citizens.

China – This is a two-sided coin. It is well on its way towards its economic recovery, which is good for trade. But on the other hand, they continue to fully exploit their use of central planning to challenge capitalism.

Russia – I don’t know if their government is directly involved in the current rash of cyber-attacks, but this is something that has to be contained.

So, situation normal, lots of challenges mean lots of opportunities. But, is the current economic path transitory or sustainable?

I expect “things’ will be fine in the second half of 2021, maybe not as good as the first half, but fine, nonetheless.

❖ The current vaccines will most likely minimize the devastating impacts [hospitalizations, death] of the new variants with widespread adoption.

❖ As we get closer to school opening this Fall, the vaccination level will increase.

❖ Inflation will continue to moderate. It may be slightly higher than we’ve been accustomed to but nothing like the 1970’s.

❖ Interest rates will remain at historically low rates and will therefore remain stimulative for the economy.

❖ The employee / employer dynamic will most likely swing back to the employer sooner rather than later.

❖ I think we will get smarter regarding our issues with China and Russia.

Here’s hoping for a solid second half!

July 9, 2021

Apr 192021

April 10, 2021

Whew! March 2020 seems like a lifetime ago! We had just started on this COVID induced adventure. It’s turned out to be a series of personal, political, economic, and medical twists and turns. Hopefully, we’re getting a handle on the pandemic and can look forward to a more stable (normal) time period.

We had the deepest and quickest economic contraction at least since World War II. Now it appears we may post the best economic growth spurt in my lifetime. Of course, this will not be a straight line, but the promise is certainly there to make such a prediction.

Here’s a T-Chart with some of the pluses and minuses:

The current pace of COVID-19 vaccinations is providing significant support for the economy.Vaccine hesitancy and the COVID-19 variants risk stalling or at least slowing businesses reopening and leisure travel.
The labor market has made some steps toward recovery with almost 1 million jobs added last month.However, there are still about 8.4 million less people employed than a year ago.
The Federal Reserve Bank has effectively gone all in to keep the economy in recovery mode.Its balance sheet has increased substantially. How will that impact the economy longer term?
Interest rates will remain at extremely low levels supporting economic activity and asset values of all kinds.Someday, interest rates and asset values will return to a more typical relationship. Will this be a smooth adjustment?
In the short term, inflation is going to be higher than we’ve been used to. For now, this transient inflation is related to pandemic related supply disruptions.However, if it’s permanent due to monetary and fiscal policy actions, inflation will add another layer of complexity to the recovery.
The various stimulus/economic support payments have had a very positive impact on the overall economy.What happens as these payments come to an end?

For equity investors, the past twelve months turned out to be a ‘rainbow’ year. I don’t think anyone would have predicted the kind of equity returns we’ve seen, at least so quickly. On the other hand, you do have to remember how bad March 2020 actually was!

I believe I said last year not to get overly concerned about one month’s investment returns. This year, I would make the same comment – do not expect the recent returns to be a “new” normal.

As a reminder, Vanguard’s most recent outlook suggests US Equity returns of 3% to 5% going forward and bond returns to be in the 0.8% to 1.8% range. They also suggest the median volatility for US Equities to be around 16.9%. In essence, that means the stock market return could range from +21.9% to -11.9%. This could be a pretty wild ride.

Last summer, the prognosticators were giving us an alphabet soup of options for an economic recovery. At this point, I’m sticking with the K-shaped version. The people who could work from home are most likely on the upper leg of the K. On the other hand, if you lost your job and/or had COVID related challenges, you are most likely on the lower leg of the K.

For the remainder of 2021, the big factor will be the evolution of the coronavirus. When will the vaccine and other measures get the pandemic behind us?

Of course, as we deal with the pandemic, we still have our ‘normal’ economic concerns to deal with. It appears we’re on the edge of a long-term transition regarding energy. It will also be interesting to see if this tentative move from Reaganomics, pushed by the pandemic, is a longer-term phenomenon or transitory.

I see some suggesting that we are entering a Goldilocks stage of economic growth. This seems to me to be what the market wants to expect – low interest rates, economic stimulus, etc. will lead to a very robust recovery without long term inflation.

In the end, je ne sais quoi. But, what will be will be!


From today’s WSJ:

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Apr 202020

Prescient or Pollyannaish? Explaining the market’s rally.

Blue chips rallied 2.2% last week despite a parade of grim news such as soaring claims for unemployment insurance and plummeting retail and industrial activity.

Is the stock market telling us something? Could it be fulfilling its role of predicting the future of the economy? Maybe its lulling into a false sense of hope for an economic recovery? Perhaps it is confused and as uncertain about the future as the rest of us!

I believe “To be or not to be” is from one of Shakespeare’s plays. The question today is “prescient or Pollyannaish”?

Not only do we want to know what the new normal is going to be, but as importantly – when?

Wishful Thinking?

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Apr 142020

As ugly as this chart is, I can only hope its at least about right!

I’m confident of a recovery, but this looks a lot more optimistic than seems likely. Although the first stage of the recovery may be pretty strong, I think the remainder will be much more gradual.

Of course, the caveat to any of this is that it is dependent on the health care issues stabilizing. It would appear that amy be the case for some parts of the United States, others may have a long way to go.

So far, the, known, impact has primarily been in developed countries, many of which struggled with managing the health care issues. What happens when it takes hold in the less developed countries, who at best have limited health care abilities?

Let’s hope for the best, but we now know the worst case is possible.

Unemployment – Wow!

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Apr 132020

The rate of change and disruption caused by COVID-19 is stunning by almost any measure.

The first chart shows the extra-ordinary magnitude of the individuals filing for unemployment insurance the last three weeks.

Whether Google searches are a good leading indicator or not, I don’t know. But, at least for now let’s hope that it can be in this instance. This chart would suggest that number of claims filed may have peaked or will at least start a downward trend.

We will find a ‘new normal’ let’s hope its soon!

The big known, unknown – when!

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Apr 062020

This is from the NYT – Morning Briefing. I believe the Q&A is with Ron Lieber.

Will the U.S. economy bounce back to where it was before, or do you expect lasting changes?
If we continue to believe that capitalism and market economics are the right way to structure our country, then there probably ought to be at least some way our economic activity will revert to some level of normalcy. I would not believe anybody who is trying to predict when that will be.
You’ve written in the past couple of months that despite the tumult in the stock market, most people should pretty much sit still. Is that still the case?
All the best economic science tells us that if — and it’s a big “if” — you’re willing to stay invested in stock for decades and decades, if you just sit still more or less, keep putting money in at regular intervals, and sell some stock when stock prices get too high and buy some stock when the prices fall, you will do better and earn more than most professional brokers.
Now, that’s a science-based answer — it’s not quite a behavioral-science-based answer. I recognize that there are people who have never been psychologically tested in this way.

It would seem the bottom line answer is if you have faith in our market economy and democracy, things will eventually return to ‘normal’.

Right now, we may not know what ‘normal’ will look like, but we will get there.

The bigger challenge will be when and that is the big known, unknown.