Client Letter | 3Q 2021 Recap & 4Q 2021 Outlook

Most often we don’t like to get too data heavy. This year has been something of an anomaly of sorts, but then again, not really.  So why an anomaly?  Inflation concerns sparked a push to raising interest rates, which hasn’t really happened. This has been partially due to the jobs numbers, which we go into more depth in the later part of the outlook. There is an indirect relationship with rising rates and technology, which is why tech has been struggling.  Global logistics is creating a supply and demand issue across industries, most recently seeing in the raising price of oil.  However, clean energy, something that has taken flight in 2020, has been stalled, posting losses for the year.  Clean energy is clearly the future but has well underperformed.

Why “not really”?  We saw a big rally in value, a decline in growth, and if history continues to repeat itself, 2022 should a great year for our story.  A story that looks at where we are moving as the world changes.  We feel this is very similar as to when we had the industrial revolution.  We have found a way to do things faster, cheaper and better, and the companies and industries that are holding onto the old ways will go the way of the dodo bird.

After the plague came the renaissance!

The first 3 quarters of 2021 have come with both surprises and things we expected.  There are a few ways we are looking at the trend that took shape in 2021. 

  1. Value stocks showing strength after a year that crippled it through covid is creating a new baseline for the bull market to move higher.  Good news for 2022.
  2. The strength in the rebound and the fact that energy and financials are leading the pack are headscratchers, but that is news versus reality.

When we dig deeper, most of the headlines we expected, but the surprises were really in the magnitude of how the market has reacted.  We chalk this up to extrapolation; people take a current trend and draw a straight line to predict where it is headed.  While it makes some sense, we encourage those extrapolators to take longer time horizons into perspective when drawing these trend lines, and when we do that, a very different story emerges.  More on that below.

So what is the big picture take away from the current headlines, the wish-washy market we have been experiencing, and what awaits us for the future and 2022?  Here are a few things that we think are worth highlighting

1) the economy is in solid growth mode, no matter how much people want to remain skeptical:  Whether we look at corporate earnings, consumer savings positions, or productivity, things are looking pretty good for the economy.  Not just because we are rebounding from a total shutdown in 2020, but also because we did some really great things to limit the pain, both on the private sector front and public sector. 

2) The digital world continues to show significant growth: one of the amazing realizations during the past 20 months is that technology is immune to pandemics; in fact, it thrives in them!  We don’t like lockdowns and health scares, but the events of the last year and a half only reinforced how things are changing, and we prefer to be on the right side of change.

3) Inflation:  Is it real or transitory?  The struggle to find employees post unemployment benefits has impacted wage growth. Supply chain constrictions have increased the cost of goods, where the biggest headlines are in oil.  Here is the question we should be asking:  With regulations changing, alternative energy being a global initiative, and oil breaching $80 per barrel, why is the clean energy sector negative on the year?  Answer:  There is a lot of short-term trades impacting the market.   While some things are going up, deflation is happing across all things technology, and when supply chains open up, how significant will inflation be impacting markets?

Delta Variant Signals the Pandemic’s Continued Grip

Please refer to Figure 1 for a clear image of where we are at.  To put it simply, things were bad, they got a lot better, and then they got worse, but not as bad as before. 

So where to next?  We don’t know for certain, but it is clear it is not a straight path forward.  It is probably going to be wave like, with each wave decreasing in magnitude.  So in short, not out of the woods yet, but through the thickest and scariest parts.

Job Growth Slows Despite Openings at Record High

We saw enormous job gains at the beginning of the summer to only see them sputter out in the last 2 months.  So, what gives?  Well, delta variant and a slowdown in the growth of leisure and hospitality.  This all results in 5 job opening postings for every 4 people unemployed (and still in the labor force).  Should we be concerned?  Not really, and this goes back to the waves comment above about Covid cases.  We should not expect everything to go back to normal in a straight line, but we shouldn’t freak out every time the trend pivots on its path.

Supply Chain Disruptions Pressure Growth Outlook

This story is still developing.  Manufacturing & logistics (transport, and unloading) have been a struggle.  The latest is that China is looking at a full opening come the end of November in some cases.  That being said, the market seems to have come to conclusion that problems in the supply chain are really bad and here to stay for a long time.  This is certainly a possible outcome, but real opportunity in the market presents itself when opinions swing too far in one direction and the conclusion is not resolute.  The same way we saw creative solutions to lockdowns and companies continue to find ways to keep the gears turning, we think the same kind of ingenuity will resolve the supply constraints.  In fact, when we listen to earnings calls and hear executives talk about supply issues, it is always happening to someone else, or it is used as justification to increase pricing.  While this is an issue which deserves attention and discussion, it does not deserve 100% of attention and discussion.  Let’s keep things in perspective, remember we just suffered a major natural disaster in the Northeast, and that things could quickly normalize as we turn the chapter to 2022 and ease a lot of these concerns.

Inflation Pressures Remain Elevated but Ease Slightly

Since this issue is so controversial and of such concern, we will really dive into the data here to try and make our point.

Inflation pressures remained elevated during the third quarter as the economy battled the labor shortage and supply chain disruptions. The Personal Consumption Expenditures (PCE) Price Index, which measures the prices individuals pay for goods and services, rose +4.3% year-over-year during August 2021. While August’s PCE inflation year-over-year reading was the highest since January 1991, more recent month-over-month data indicates the growth rate of inflation is easing as the economy gradually reopens and inflationary pressures fade. The PCE price index rose +0.4% month-over-month during August compared to +0.5-0.6% during each of March, April, May, and June 2021.

Figure 2 charts the PCE Price Index’s annualized quarter-over-quarter growth. The chart shows the PCE inflation rate held above 2% for most of the 2000s but fell below 2% for most of the 2010s. With inflation spiking this year, the question moving forward is, “Where does the inflation rate settle during the 2020s”? The Federal Reserve believes inflation pressures are transitory (i.e., temporary), implying inflation will settle back to levels from the 2010s. However, some investors believe inflation pressures will persist for an extended period of time, which implies the inflation rate will return to the levels experienced in the 2000s. It is still too early to tell, but the answer will have profound investment implications in the years ahead.

Fourth Quarter 2021 Outlook – Can it Continue?

Close your eyes, take a deep breath, block out all the things that are giving you anxiety, and think about all the things you are looking forward to in the next 6 months.  I see a holiday season with family I haven’t gotten a chance to really connect with in over a year.  I see kids getting back into the swing of school and reduced anxiety over being away at work.  I see us all becoming more accepting of the changes in our life and adapting to the new modus operandi of our economy.  I see continued innovation in almost every aspect of how we work together, congregate together, heal each other, and find outlets for our passions. 

It is really an exciting tomorrow and curse the jerk that tries to cloud it up with negativity and predictions of disaster ahead.  Those predictions are a dime a dozen, tend to come every time a little light breaks through the clouds, and haven’t made any durable money for anyone at any point.  In fact, I can count a few instances where people watched a few fortunes pass them by from taking the advice of naysayers and cynics.

We hope you have the best holiday season ever!  May the road rise to meet you, may the wind always be at your back, may the sun shine warm upon your face, and the rains fall soft upon your fields.  Saluti, cheers, l’chaim, slainte!

Investment Advisory Services are offered through Green Ridge Wealth Planning, a registered investment adviser.

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