By Tim Courtney, Chief Investment Officer
September and October have historically been months that can concern investors as this time of year has witnessed its share of significant market pullbacks.1 However, it’s encouraging that markets are being supported by a foundation of strengthening fundamentals.
A primary component of that foundation has been record earnings. While much of the earnings growth has been expected, estimates for the year have moved even higher as the year has progressed. We’ve already set a record for second-quarter earnings and are well on pace to reach an annual earnings record.2
Another encouraging sign of market health is that some previously weak sectors are seeing great performance, and small companies have far surpassed their previous earnings record.3 Because small company earnings are now well above their long-term trend line, it’s unlikely they will grow as fast moving forward. But even if that growth returns to more normal levels, the current earnings level has gone a long way to support current stock valuations and prices.
By saving money, having easier access to capital and low borrowing rates, consumers have driven the earnings push and overall growth. Additionally, many people have refinanced their homes and are enjoying those proceeds,4 which we believe will likely extend into next year.
Of course, demand is causing inflation and shortages, which we can see in cost increases for a number of goods and services.5 This could also mean that companies, many of which up until now have been cautious and hoarded cash, will need to start putting cash to work by investing in new production and equipment to better control rising costs. This spending could help maintain economic momentum into next year as household spending grows more slowly.
As always there are risks the market will consider. First, the resurgence in coronavirus cases is concerning markets and households, as evidenced by the recent Consumer Confidence Index that hit a six-month low.6 As more people cancel travel and spending plans, there’s a risk that a recovery in several sectors could be curtailed.
The second potential headwind for markets and investors is the unparalleled government spending over the past year-and-a-half in an effort to stabilize and stimulate the economy.7 If the old rule about free lunches is accurate, that spending will need to be counterbalanced — by debt and tax increases, which will likely slow growth. We’ll learn more as tax proposals become more fully formed.
Markets have been supported by strong momentum and good fundamentals as we go into the last few months of the year. Even with their bad reputation, September and October have not been the worst months to invest over the last decade (those have been May and August). Markets will continue to assess risks and if you have any questions about current market conditions, please contact your Exencial advisor.
1. Investopedia (5/17/20) — Why people say September is the worst month for investing
2. The Wall Street Journal (8/8/21) — Record pace for corporate earnings keeps stocks buoyant
3. Zacks Investment Research (8/20/21) — Taking stock of small-cap earnings
4. The Ascent (3/10/21) — More people refinanced last year than during the 2003 refinance boom
5. CBSNews.com (6/11/21) — Consumer prices are rising. Here’s what’s increasing the most — and why
6. The Associated Press (8/31/21) — US consumer confidence falls in August to 6-month low
7. CNBC.com (4/14/21) — The economy is running on a stimulus-fueled caffeine high. What will happen when it wears off?
Based on the results of a monthly survey the Consumer Confidence Index attempts to reflect trends in prevailing business conditions and likely developments for the months ahead. It incorporates consumer attitudes, buying intentions, vacation plans and consumer expectations for inflation, stock prices and interest rates. Data are data available by age, income, region and top 8 states.
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