Ted’s Talk: My Market View Entering Fall of 2021
It’s hard to believe that it’s already August and fall is right around the corner. I thought now would be a good time to connect with you all and share my views on the financial markets as we enter the second half of the year.
As far as the stock market is concerned, stock traders are on their last summer vacations like millions of Americans taking advantage of time away from their jobs to be with their families. For this reason, among others, the stock market is typically quiet. Performance-wise, August has historically shown to be a weaker month for market returns for this reason and others.
But, unlike previous historical trends, I’ve been thinking about how August 2021 may be different:
It’s fair to say that the economy is in pretty good shape as we enter a post-COVID 19 pandemic way of life – but it’s important to remain cognizant of the depth and duration of the Delta variant. It’s hard to predict the future and how the Delta variant will impact the markets in the coming months, but I think it’s prudent to be aware of the variant hanging in the shadows for the foreseeable future.
U.S. Companies reported generally strong earnings in Q2 this year, but the challenge will be whether these improved earnings can be sustained over time.
Since interest rates have remained at very low levels, stocks have been the “only game in town,” so to speak. The Federal Reserve has been able to continue supporting the economy by keeping rates low – but will they be able to continue to do so?
A word we haven’t heard much about since the late 1970’s and early 1980’s is back: inflation. My hope is that the recent spike in inflation will be short-lived as we transition from strong economic recovery post-pandemic to more normal economic conditions.
I do have to say that inflationary pressure is a concern due to increased government stimulus out of Washington, D.C., which initially began in the middle of last year and has not only continued but accelerated in 2021. Continued government stimulus could further impact inflationary effects as deficits continue to rise.
Will the Fed need to change course and start raising rates to combat inflation? That is a legitimate question which could adversely impact stock market returns as lower risk investment options become more appealing.
The nation’s debt ceiling will need to be addressed in October and could result in a battle between both political parties. This could significantly increase market volatility, and a familiar word will creep back into our consciousness: uncertainty. Unfortunately, with the political polarization in our country, it creates varying degrees of uncertainty – a new normal we find ourselves in.
At this stage, it seems there are two significant risks that I like to call “shutdown uncertainty” that could be a player in fluctuation within the markets. To the extent the Delta variant impacts the health of our nation and results in further restrictions, as well as any government shutdown from debt ceiling negotiations, these two unknowns could have a damaging jolt to sound economic and fiscal policy.
For those of you invested in IEM’s Investment Advisory Models, I want to make clear we monitor them on an ongoing basis. This includes evaluating a variety of investment types within our models, and we rebalance these models when appropriate if stock to bond allocations outweigh one direction versus the other.
Lastly, I think it’s important to remind people that the rules we preach at IEM still apply:
Keep your investments well-diversified
Look at your time horizon; if funds are needed in the short-term keep that portion of your portfolio low-risk or risk-adverse. If you are investing for the long-term, be patient and continue investing while not timing the market.
Do an honest assessment of your risk tolerance level. Most importantly, if there are changes in your financial situation now or in the future, please communicate regularly with your financial advisor. All of us at IEM welcome any questions or concerns you may have.
I wish you all a safe and prosperous remaining 2021!
~ Presented by Edward “Ted” Smith