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Is The Market’s Rollercoaster Ride Leveling Out?

September 17, 2021

By Tim Courtney, Chief Investment Officer

 

Over the past year and a half, market investors have experienced some of the worst and best performance in market history. In March 2020, it experienced a deep plunge caused by the onset of the COVID-19 pandemic, but rebounded and has since soared. The first half of 2021 finished with all three major benchmarks up by double-digit percentages.1 They have since continued to reach all-time highs throughout the summer.

Along with this, companies have reported record earnings and many households have become flush with cash due to savings, government stimulus and home refinancings. This has caused consumer spending and GDP growth to swell in the first half of the year.2

However, these swings have not been normal and we may be reaching the part of the rollercoaster where the track begins to level out. We’ve already seen early signs of this over the last several weeks.

At the start of the pandemic, the economy essentially shut down and stayed closed until it was revitalized months later. But the economy is too complicated to simply turn off and on again without any consequences. For the past year or so, the market has focused on the reopening, stimulus and impressive earnings with very little reaction to bad news. Now, the market seems to be more sensitive to potential headwinds:

  • While the stimulus and the Fed’s bond buying helped kickstart the economy, the country must now deal with the debt it has incurred from these programs. In July 2021, U.S. debt sat at about $28.43 trillion, an increase of $1.9 trillion from June 2020.3 This debt will have to be reconciled and paid for with expected tax increases.
  • The housing boom and car shortages seen earlier in the year are starting to tail off and ease, respectively, but there are still shortages in areas that no one could have expected. Even the publishing industry is struggling to print books because it can’t find paper suppliers. This situation affects other companies all along the production chain. Such shortages will start to have an impact on earnings.
  • Originally seen as transitory, inflation reached much higher levels than what the Fed originally predicted. According to recent Labor Department data, the consumer price index (CPI) jumped 0.3% in August and 5.3% from the same month last year.4 This is slightly cooler than expected, though these levels are still well above historical averages.
  • While the economy is recovering, we’re not out of the woods yet regarding the pandemic. The delta variant, as well as other variants, are still spreading. It’s hard to predict the extent of the pandemic’s impact on consumer spending and market performance, but airlines and other travel companies have noted that it is seeing more cancellations that are impacting near-term earnings in 2021.

Overall, we believe there is enough growth and earnings momentum to carry well into 2022. However, we also think the market will become more sensitive to economic headwinds than it has been over the last 12 months. If you have any questions, please contact your Exencial advisor.

Sources:

  1. Nasdaq (6/30/21) — Stock markets post a strong first half of 2021
  2. Fortune (7/29/21) — U.S. economy is bigger than it was pre-COVID after quarter of booming consumer spending
  3. Statistica (8/10/21) — Public debt of the United States of America from July 2020 to July 2021, by month
  4. The Wall Street Journal (9/14/21) — Inflation eased in August, though prices stayed high

 

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Dow Jones Industrial Average (DJIA), also known as the Dow 30, is a stock market index

that tracks 30 large, publicly-owned blue-chip companies trading on the New York Stock

Exchange and the NASDAQ. The DJIA is the second oldest U.S. market index; the first was

the Dow Jones Transportation Average. The DJIA was designed to serve as a proxy for the

health of the broader U.S. economy.

The Nasdaq 100 Index is a basket of the 100 largest, most actively traded U.S companies listed on the Nasdaq stock exchange. Nasdaq is a global electronic marketplace for buying and selling securities and was created by the National Association of Securities Dealers (NASD), which is now known as the Financial Industry Regulatory Authority (FINRA). The index includes companies from various industries except for the financial industry, like commercial and investment banks. These non-financial sectors include retail, biotechnology, industrial, technology, health care, and others.

The Consumer Price Index (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food, and medical care. It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them. Changes in the CPI are used to assess price changes associated with the cost of living. The CPI is one of the most frequently used statistics for identifying periods of inflation or deflation.

PAST PERFORMANCE IS NOT AN INDICATION OF FUTURE RETURNS. Information and opinions provided herein reflect the views of the author as of the publication date of this article. Such views and opinions are subject to change at any point and without notice. Some of the information provided herein was obtained from third-party sources believed to be reliable but such information is not guaranteed to be accurate. In addition, the links provided within are for convenience only and the provision of the links does not imply any sponsorship, endorsement, or approval of any of the content. We do not guarantee the content or its accuracy and completeness. The content is being provided for informational purposes only, and nothing within is, or is intended to constitute, investment, tax, or legal advice or a recommendation to buy or sell any types of securities or investments. The author has not taken into account the investment objectives, financial situation, or particular needs of any individual investor. Any forward-looking statements or forecasts are based on assumptions only, and actual results are expected to vary from any such statements or forecasts. No reliance should be placed on any such statements or forecasts when making any investment decision. Any assumptions and projections displayed are estimates, hypothetical in nature, and meant to serve solely as a guideline. No investment decision should be made based solely on any information provided herein and the author is not responsible for the consequences of any decisions or actions taken as a result of information provided in this book. There is a risk of loss from an investment in securities, including the risk of total loss of principal, which an investor will need to be prepared to bear. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be profitable or suitable for a particular investor’s financial situation or risk tolerance. Exencial Wealth Advisors, LLC (“EWA”) is an investment adviser registered with the Securities & Exchange Commission (SEC). However, such registration does not imply a certain level of skill or training and no inference to the contrary should be made. EWA may only transact business in those states in which it is registered, notice filed, or qualifies for an exemption or exclusion from registration or notice filing requirements. Complete information about our services and fees is contained in our Form ADV Part 2A (Disclosure Brochure), a copy of which can be obtained at www.adviserinfo.sec.gov or by calling us at 888-478-1971

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