Broker Check

3rd Quarter Market Commentary

Take the Long View

Some wealthy investors see great opportunity with the rollout of vaccines and the opening-up of the economy. At the same time, market volatility has revealed a significant challenge to growth by serving up gyrating markets and broad market pull backs. What’s going on?

Prudent investors and well-informed savers know that many factors drive markets. The one thing to be suspicious about is what you hear from the general media. If markets are up, they will report the positive cause. If markets are down, they will cite something negative and thus satisfy public curiosity! The truth is there a many conflicting factors that drive markets and many of them are counter to market direction at any given time.

You may find markets advancing with several negative pressures prominent. This is sometimes referred to markets “climbing a wall of worry.” At other times, many things seem to be going right and yet the market will slide lower or experience severe volatility.

So, what are the factors driving the current market volatility?

Positives
Broad administration of multiple vaccines, opening of those sectors of business that have been shut down for over a year, and the expected huge gains in employment, all bode for prosperous times and higher market values. But, that positive pressure does not seem to fit the recent slide in financial markets.

Negatives
Contrary to the positive developments above, three negative factors seem to worry investors: Yield, Inflation and Higher Taxes. Then10-Year Treasury yields began to rise in mid-February. Traditionally, higher interest rates indicate a slow down in business and commerce. So, some investors have taken the cue and sold equities. At the same time, as yields rise, bond values go down.

Meanwhile the Fed has not changed interest rates, or even given any indication of future raises. In fact, the Fed sees inflation to be below their 2% target. [The Fed 2% target is based on a metric called the “Headline Personal Consumption Deflator” which as of February 2021 stands at 1.60%] Also, the Fed does not see inflation rising significantly in the coming months. [Fed March 2021 projections 4th Quarter to 4th Quarter inflation are 2.0% in 2022 and 2.1% in 2023.]

However, investors fear that inflation is on its way. According to Inflationdata.com, Inflation Expectation shows 2.20% as of March 31, 2021. In agreement with such expectations, mortgage rates have risen and advertisements taunt borrowers to act soon “before rates rise and you regret you did not take action to lower your mortgage rate!”1

In addition, businesses are on edge because of the proposed increase in the corporate tax rate from 21% to 28%. Conservatives cry that this will lead to job reductions and economic disaster. However, the former corporate tax rate was 35% before Trump’s 2017 Tax Cut and Jobs Act. What do you think about a pending 28% corporate tax rate? Will it be inflationary? Will it drive the stock market lower?

Outlook
What can we expect for the stock market in the coming months? Clearly investors worry over rising interest rates, inflation, and rising tax rates. All of these are legitimate reasons for investors to worry. And so far financial markets have bounced around showing the significant influence of these worries.

In spite of these concerns, it seems the general direction of the economy is to move out of restrictions and to open up. Some sectors of the economy have had boom times during the pandemic: Online commerce, delivery, work-from-home technologies and more. On the other hand, some sectors have been devastated: Travel, hotels, restaurants, theaters, concerts, sports events, landlords and more — just to name a few. Mostly, these are lower paid workers. But the owners of these businesses have had a very tough going. Many businesses are gone never to return.

During the coming months, the closed sectors of the economy are expected to come back – Perhaps slowly but come back strong. Economists see high pent-up demand and lots of savings ready to move back into circulation.

Government stimulus money has been a lifeline for many. Those who have been able to work during the pandemic were not able to spend money on the closed sectors of the economy. People who have not been able to spend, are ready to “get back to normal!” The latest infusion of government cash into the economy comes as a $1.9 trillion Relief package signed March 11, 2021. In addition, President Biden has proposed a huge infrastructure spending plan over $2 trillion!2

All this money coming into the economy will mean jobs and more jobs. Since people who need relief will have money for essential services. Moreover, infrastructure spending, if the bill passes, will mean not only a huge number of high paying construction jobs, but those dollars will circulate again to support Ma & Pa businesses and consumer goods and services, as those workers spend their construction incomes.

Another effect of higher employment is more people will be paying taxes! That makes the government spending on stimulus easier to pay back. Additionally, the Infrastructure spending may benefit big corporations with more efficient commerce and potentially higher revenues. Will it be enough to offset the higher taxes, resulting in good or higher profits for shareholders? That remains to be seen. But the effect of an improved infrastructure will be a significantly improved economy in any case.

So, despite the worries over volatility, inflation and higher interest rates, economists see the coming 12 to 18 months as not only bringing a growing economy but producing a booming economy!3

Conclusion
So, what is the proper outlook? The positives for this commentator far outweigh the negatives. There is money, pent-up demand and an opening economy, with many new hires and higher employment expected in the coming months. In addition, the infrastructure program will make the U.S. economy more competitive worldwide. As the international economy improves, we will likely see more synergy with emerging markets and more imports and exports.

Stock markets may continue to be volatile as the thousands of opinions compete over opposing expectations. Bond prices will likely drift lower and interest rates will likely rise modestly. But the fears over both of those and fears of higher corporate taxes choking commerce are likely far worse than the reality to follow.

As Winston Churchill said, “We have nothing to fear, but fear itself.” That may be true again today more than ever.

Sincerely,

 

 

David L. Harris, PhD, ChFC, CFP®
Wealth Advisor 
HARRIS & ASSOCIATES

A Registered Investment Advisor

(310) 318-3700
www.harrisadvisory.com

IMPORTANT DISCLOSURES:

Harris & Associates is a Registered Investment Adviser. This commentary is solely for informational purposes and not a solicitation to invest. The results reflect the deduction of fees and the reinvestment of dividends and other earnings. Advisory services are only offered to clients or prospective clients where Harris & Associates and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. The performance is based on the strategy described above involving selling equity assets, gathering cash and hedging portfolios with inverse ETFs in an effort to combat sliding markets. Investing involves risk and possible loss of principal capital. No advice may be rendered by Harris & Associates unless a client service agreement is in place. More information about Harris & Associates including our investment advisory fees are described in Form ADV Part 2 available on the Investment Adviser Public Disclosure website. Please contact a financial advisory professional before making any investment decisions.

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