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Strategic Insights

Volume 10, Edition 36 | October 18 - October 22, 2021

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Investors Should Avoid Chicken Little

Doug_Walters Doug Walters | Articles

Read Time: 3:00 min

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We live in amazing times, where information and news come to the palm of our hands continuously. Yet, as the last few weeks have highlighted, investors should be careful reading too much into the scare stories being tossed around by financial bobbleheads.

Stagflation? Supply chain headaches? Tapering of Fed stimulus? Yesterday’s worries have been relegated to the history books as the S&P 500 hit an all-time high this week. What has changed in the past few weeks to drive this capitulation? Not much.

Companies have made an excellent showing to kick off the earnings season. But otherwise little has changed over the past few weeks to justify the swing from “doom and gloom” to “sunshine and rainbows” that have propelled stocks to new highs. Such is the nature of the stock market. Equities are volatile. As stockholders, we are willing to accept that volatility because we believe attractive returns will reward the risk over time. The return cannot exist without the volatility.

The past few weeks are a great example of just how unpredictable stocks can be in the short term. Stocks are, by definition, risky assets, but for many investors, the more considerable risk is themselves. From early September to early October, US stocks fell. Every financial Chicken Little was spreading scare stories of inflation and stagflation. It would have been easy for a jittery investor to decide to take their assets and run to the sidelines. Yet, had they done that, they would have missed the 6% rally that brought stocks to fresh highs. That would have been an enormous loss of return. Once you make a market timing mistake like that, it is gone for good, and worse than that, the error will compound over time (a $50K mistake today can compound into a $400K disaster 30 years later in retirement).

But that is not to say we are out of the woods on high inflation and potential stagflation. The brightest economists at the Federal Reserve cannot even agree if we are even in the woods. The future is never that clear, and the investor who recognizes this has a strategic advantage. For us, that is at the heart of evidence-based investing.

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Source: CartoonStock

 

Headlines This Week

Contributed by Doug Walters , Max Berkovich , Frederick Hole

Just a few weeks after stock market bears announced that the sky was falling, major US stock indexes like the S&P 500 hit all-time highs. Despite declines on Friday, stocks are up about 6% from the early October lows. While the “buy the dip” mentality remains a formidable force, corporate earnings season was also helpful in lifting investor sentiment this week.

An Earnings Boost

This week, third-quarter corporate earnings provided a lift to stocks as results have generally come in better than expected.

  • Of the 23% of companies in the S&P 500 that reported, 82% have positively surprised on earnings, while 77% have positively surprised on revenue.
  • Based on these early results, earnings and revenue growth for the entire S&P 500 are expected to be up 33% and 15%, respectively. Those are big numbers and help quell the concerns about stagflation that we discussed last week (The Great “-flation” Debate).

Inching Forward on Infrastructure

The next bout of fiscal stimulus is likely to be in the form of an infrastructure bill or two. The debate appeared to move forward this week regarding the more expensive “social infrastructure” bill.

  • The White House had indicated the framework of a deal might be worked out this week, but, as we type, no framework has been agreed. The latest price tag expectations are $1.7-1.9T.
  • Senators Manchin and Sinema are the holdouts for the Democrats, with concerns over the size of the bill and how it will be funded.
  • There is a desire by the White House to pass both infrastructure bills next week, but that looks unlikely.

Not so Transient

The Fed this week appears to be hedging its bets on just how “transient” inflation will prove.

  • High demand, combined with a tight labor market and supply chain constraints, has resulted in rising prices.
  • We have also seen the impact of these dynamics in the bond markets, where yields have been steadily pushing higher.
  • Notably, the Fed policymakers have been backing down on the “transient” commentary. It is not that they do not see inflation as transitory, but rather that the elevated pricing pressures may be with us longer than anticipated.

The Week Ahead

Time for a Hike?

The Bank of Canada (BoC), the European Central Bank (ECB), and the Bank of Japan (BoJ) will all meet next week amid rising concerns over growth and inflation. 

  • The Bank of Canada is up first on Wednesday and is expected to continue its reduction of asset purchases, with the program ending completely in December. 
  • The market has priced in three interest rate hikes for 2022, with the first coming up in April, but among the strong recovery of the Canadian economy, the central bank could signal that rate hikes might be coming sooner.  
  • The ECB will meet Thursday and is facing a much bleaker outlook with stagflation fears growing as well as supply chain disruptions that are hampering growth while keeping inflation hot. 
  • President Lagarde is likely to push back against the market’s priced-in rate hike next year while keeping an ultra-loose monetary policy stance. 
  • No big news is expected from the Bank of Japan on Thursday as it will not raise interest rates anytime soon as the country barely managed to escape deflation. 

Data Storm Incoming

It will be a hectic week on the data front as many key figures from inflation to growth will be out. 

  • For the US, Thursday and Friday will be busy as personal income, personal spending, personal consumption expenditures (PCE), the Michigan consumer sentiment index, and Q3 gross domestic product (GDP) are all out. 
  • GDP might be the big one to look at on Thursday as there is quite the mismatch between economists’ forecasts for annualized growth at 3.2% and the Atlanta Fed’s projection of just 0.5%. 
  • Regardless of which forecast is correct, GDP growth is undoubtedly expected to show signs of slowing after Q2’s 6.2% growth. 
  • Internationally, the Eurozone will be releasing its Q3 GDP estimates and October’s preliminary consumer price index (CPI) reading, both out on Friday. 
  • Additionally, the UK’s finance minister will be presenting his latest budget on Wednesday, which will likely see government spending dialed back as concerns over inflation have not disappeared yet.  

Tech Week

Earnings season is well underway, as the biggest names in tech are set to report earnings next week. 

  • Facebook (FB) is up on Monday amidst growing criticisms and Senate hearings over the company’s impact on young adults and children.  
  • Microsoft (MSFT) and Alphabet (GOOG) will report Tuesday with forecasts projecting increased earnings over last year for both companies.  
  • Rounding out the week will be Apple (AAPL) and Amazon (AMZN) on Thursday. 
  • Other names to look out for over the week are Visa (V), Coca-Cola (KO), Boeing (BA), Robinhood Markets (HOOD), and Exxon Mobil (XOM).  

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