Two Questions About the Market Today

Ann Miller |

Have we seen the market highs for the year?
Do we face a long list of worry or opportunity?

As the equity markets finished the third quarter of 2021 with significant weakness, we remind our readers that the markets maintain a respectable return for the year.  The month of September saw both the Dow Jones Industrial Average and the S&P 500 lower by more than 4.00% and the tech heavy Nasdaq lower by more than 5.00%.  However, each of these indices are higher by 10.00% or more for the year although most of that gain was from January through August.  One question as we enter the fourth quarter is “Have we seen the market highs for the year?”

In past market comments, we discussed a wide variety of subjects affecting our markets including COVID, inflation, supply shortages, Chinese regulatory crackdowns, the U.S. debt limit, a possible government “shutdown”, Federal Reserve “tapering”, and rising interest rates.  But wait, there’s more … rising oil prices, confusing jobs reports and the commencement of third quarter earnings season to name a few.

As your portfolio manager, we review a great deal of date on your behalf.  At any point in time that list might include market valuation measures such as price to earnings, price to book, dividend yields, earnings growth, profit margins, value versus growth, large companies versus small and how all this current data compares to past data.  Then we have labor demand, population dispersion, travel rates, household net worth, inflation, U.S. Dollar index. oil prices and rig counts, tax rates, and yield curves.  These are just a few examples out of hundreds of data points. 

The reason we exhaust you with this list of subjects and data points is to share our view that much of the current individual numerical data points appear to be – to use a technical term – “a bit out of whack”.   Statistics by their very nature want to find a numerical long-term average or an arithmetical mean and much of our current data points are at extended levels.  

But let’s remember that we are still coming out of a historic shut down of our world economy.  It makes sense that things may not make as much sense as we want them to! 

So, have we seen the market highs for the year?  We are going to lean to an answer of … yes.  We believe that inflation and rising interest rates are the items, among many, that the markets will focus on.  We also see a very volatile market through October and November as we approach the December 16th deadline for Congress to increase the U.S. debt limit.  We do note that Congress has always raised the debt limit as needed and they will again although the political game of chicken may rattle the markets for a time. 

We come to our second question - are we facing a long list of worry or opportunity?  First, we believe part of our job is to worry for you so you can sleep better at night.  We are always concerned about what might affect your portfolios and then try to minimize those concerns.   In the short term, we do see challenges that should be monitored.  As for opportunities, they may be more difficult to realize through the end of the year.  Our response for much of this year has been to lean towards value versus growth and focus on traditional guards against inflation such as financials, convertible bonds, interest-rate hedged bond funds, a REIT fund – Real Estate Investment Trust, (although we are evaluating the subsectors in this fund), a temporary higher allocation to cash and a recent entry into energy.  The good news is that our long-term approach to investing has been to always maintain a balanced approach to our asset allocation.

As always, please feel free to reach out to us at any time.  Thank you for the opportunity to serve you and your family.