October 17, 2021


  • Stocks pushed higher for the second consecutive week and are now within striking distance of all-time highs that were set during the first few days of September. We noted last week that “the market has been caught in a trading range, supported by earnings and a lack of alternatives on the downside and valuation to the upside.  That may come to an end as earnings season is about to kick off and we are about to enter a seasonably strong period for the stock market.”

To say the least, this past week’s slate of earnings, mostly from large banks did not disappoint, coming in far above expectations.  In addition, billions of dollars of reserves that had been set aside at the beginning of the pandemic will be released over the next few months, fueling the economy as well as future bank profits.

We believe that Q3 corporate earnings will be strong enough to maintain the upside bias to the market.

  • The Labor Market, namely the lack of supply of willing labor compared to the plenty number of jobs out there will continue to be a challenge for employers. The cost of labor in the United States represents approximately 60% of production so that inflation within this component of production may last longer than what we believe the Fed deems as transitory.  Evidence can be found in the NonFarm Payroll Report as Weekly Earnings have risen more than four percent over the past twelve months.
  • A hot summer in China along with perhaps too great of a reliance on renewables in continental Europe have caused the demand for coal, liquefied natural gas (LNG) and oil to spike with demand potentially outstripping supply. How long will this last and who is to blame?  We believe it will most likely be awhile before this issue will be resolved and that the rush to relatively unreliable renewables is to blame.  In fact, Europe’s reliance on renewables has increased from 20% to 30% of energy demand.
  • Inflation at both the wholesale and retail levels as measured by the Producer (PPI) and Consumer (CPI) Price Indexes remain elevated at uncomfortable levels. As noted under the section below entitled Economic Data, the PPI rose 0.5% during the month of September while the CPI climbed 0.4%.  In addition, they have risen by 8.6% and 5.4% y/y, rates that the Fed must address.
  • Prices at the pump continue to climb and will most likely not reverse course any time soon.
  • Short-term rates on U.S. Treasuries rise as long-term rates remain relatively stable, a sign that expectations of persistent inflation over the next few years remain subdued.
  • The Social Security cost-of-living adjustment (COLA) for 2022 will be 5.9%, the largest such hike in four decades. This will result in an average monthly increase of $92 for the more than 64 million participating Americans.  It will also push the average monthly benefit up to $1,657 from $1,565 and all told place more than $70 billion into the pockets of retirees and disabled beneficiaries.  It should provide an approximate 0.35% bump to economic growth.
  • It is important to keep in mind that there is quite often a disconnect between current economic activity and the stock market as the latter is a mechanism that discounts economic growth up to twelve months in advance.
  • The tug of war between growth and value continues with those that believe the economy will break out of a multi-year 2% rate of real growth battle against those that believe that once the stimulus passes the economy will revert to a modest pace of growth. We fall into camp of the latter.
  • The Federal Reserve through the U.S. Treasury Department continues to exercise traditional measures in attempting to navigate an economic rebound by pushing dollars/stimulus into the economy. Will this work?  We believe so.  However, keep in mind that historically recessions have been brought about by a lack of consumer demand.  This past one was different as it was intentionally created in response to the health crisis.  Perhaps there has been too much unnecessary stimulus trying to create demand that was going to be there anyways as the United States emerged from the pandemic.  For now, just a thought.
  • Many events don’t make sense. However, this does not prevent the human mind from trying to understand them.
  • The upcoming week is relatively quiet on the economic front. But will include the following releases – On Monday, Industrial Production and Capacity Utilization; Tuesday, September Housing Starts and on Thursday Sales of Existing Homes during September and Initial Claims for Unemployment Benefits.
  • Here we go. Corporate earnings season is upon us.  Some notable releases due out this week include – Johnson & Johnson (JNJ), Procter & Gamble (PG), Netflix (NFLX), Philip Morris (PM), Tesla (TSLA), Nextera Energy (NEE), Verizon (VZ), Abbott Labs (ABT), International Business Machines (IBM), Anthem (ANTM), AT&T (T), Intel (INTC), Union Pacific (UNP), American Express (AXP), American Airlines (AAL), Southwest Air (LUV), Chipotle Mexican Grill (CMG) and Honeywell (HON).

  • Investing is about staying within your asset allocation model as the short-term is IMPOSSIBLE to predict whereas the direction of the equity markets over the long haul is VERY PREDICTABLE. Successful investing requires the ability to harness your inclination to respond by selling during times of market stress.
  • Stock prices do not move in a linear fashion. If they did they would provide returns similar to that of your bank account rather than their historic annualized 8%-10%.  Short-term moves in both directions are unpredictable.  Did you really think that after a 60% move off the bottom in March, there wouldn’t be a correction?
  • Keep in mind that in addition to the cash in your account, the fixed income component (bonds, bond funds, bond ETFs) historically carry only minor short-term risk. Generally speaking, the greatest risk to bond holders is either a sharp rise in interest rates or a drop in credit quality.  We see neither as imminent.
  • We love the statement within an article written by Mike Santoli for CNBC who observes that it is “always worth recalling Peter Lynch’s line that more money is forgone by people anticipating corrections than is lost in corrections themselves.”
  • From the perspective of the client it is nearly as uncomfortable and for them even “irrational” to sell or rebalance during a bull market as it is to buy during a bear market.
  • We agree with a tweet from venture capitalist Chris Sacca aimed at new investors. “You’re not actually that good at it.  You just caught a wild bull market.”  To this we add – BE CAREFUL.  It is okay to have ten percent or so of your money invested speculatively.  However, much above that and you are playing with fire as historically they never end well.

  • “We just don’t have enough investor protection in crypto. Frankly, at this time, it’s more like the Wild West.”  (Securities and Exchange Chairman Gary Gensler)

Similar Posts