The market’s summer doldrums have been characterized by low volatility, reduced trading volume and tight trading ranges for the markets. This has been shaken by recent market action. The market has turned cautious due to bearish seasonality, fears of Federal Reserve action, US Fiscal Policy and international banking crisis. I thought it would be helpful to address these concerns and give an updated market outlook.
The seasonality issue points to the period of mid-September to mid-October as being one of the worst periods for returns in the equity markets. It should be pointed out this period includes the 1929 Crash, the 1987 Crash and the Lehman Brothers debacle of 2008. Coincidence and causality can go hand in hand together. I think there are a number of trading positions that are set up for this to occur, which might make it harder for it to come to fruition.
The Federal Reserve has been providing liquidity to the monetary system by being a large buyer of US Treasuries and Mortgage- backed securities. This action was necessary and appropriate during the pandemic crisis to help provide stability and confidence to the system. Remember, at one point in 2020 there were over 23 million unemployed workers in the US. Things have changed. The latest Bureau of Labor reports show there are 8.3 million unemployed and 10.3 million job openings at the end of the summer. The Fed should begin to taper, i.e., reduce the amount of buying that they do. It will take a number of months to eliminate the buying as they are expected to reduce the amount bought gradually each month. I believe once they complete the taper, they will still wait to see the what the economic conditions are before raising short term rates to levels they believe appropriate. This entire process could take another 12 months. The key point is tapering is not tightening.
The Biden Administration has proposed a number Fiscal actions to fund their approximately 5 Trillion dollar infrastructure bills. Its is broken into a $1.5T “hard” infrastructure and $3.5T in “social” infrastructure. While the final number is not known for sure, it probably won’t be quite that large but will still be very, very big. The administration has proposed funding these bills thru a number of changes in the tax code. Raising the Corporate tax rate, having a minimum international tax rate, increasing the personal tax rate on individuals making grater than $400,000 annually, changing some of the inheritance taxes and raising some of the Capital Gains rates. If these measures were to pass in their current form, there exists a fear it would cause an economic slowdown and accelerated selling of assets as gains are captured at the current rates. I don’t know what will come out of Washington with this. I would feel fairly confident in the expectation that both Individual and Capital Gains rates will be higher in the future.
Finally, China, which I consider to be the greatest risk to the market currently. China has ridden the wave of capitalism over the past few decades to expand their economy and raise the level of living for a number of its citizens. Recently there has been a crackdown on some of the more successful individuals and companies. The ruling party is promoting a “Common Prosperity” theme. As I understand it, they are playing Robinhood. Taking from the rich and giving to the poor, a redistribution of wealth. The current market attention is on the Chinese 2nd largest real estate developer. The company is heavily in debt and has warned that it may default on some outstanding bond payments. The Chinese Government may or may not step in to assist it. It should not be a systemic risk to the global economy although the debt may be held by a number of international lenders. China has also been flexing its muscles in the Pacific. It is now ruling Hong Kong, has flow fighters and bombers over Taiwanese airspace and land grabbed areas to build military bases. The US has responded by increasing it Naval presence and communication with Taiwan leaders. The two big boys on the block are trying to feel each other out both militarily and economically. Hopefully it will be nothing but a bunch of hot air.
Market corrections are part of the market behavior. As of 9/17, the equity markets were up almost 20% for the year and have almost doubled from the pandemic low. Your individual portfolios are aligned with your acceptable risk category and are monitored to remain in that range. In general, the markets experience 5% correction every 8 months on average. I believe the market is becoming more realistic in its expected returns going forward. Investors should adjust their assumptions accordingly.
The opinions expressed herein are those of Riverbend Planning Group. The data and opinions are furnished for informational purposes only and should not be considered a solicitation for an investment decision. Although it is derived from sources believed to be accurate, Riverbend Planning Group makes no guarantee to the accuracy of the information