THE RISK MANAGER Advanced Thought Leadership for Your Money®
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Christopher Gerber
Q4 2021 Market Update
THE VIRUS
The Delta variant is finally starting to decline as more are either vaccinated or have the antibodies. The variant peaked in September, 2021 at about 150,000 new cases a day and was about 115,000 per day by mid-October, 2021. Like a tornado, it left destruction in its path. The travel and entertainment industries remain only partially opened, supply chains are not fully operational, and governments continue lockdowns in several parts of the world. On the upside, pent up demand, increased stock market wealth, and remaining effects of economic stimulus may propel economic expansion. Also, supply chain issues and increasingly digital economic trends have led to a re-allocation of human capital evident in an evolving workplace, flattening corporate structures, and more automated manufacturing. The overall digital direction can reduce long-term supply costs; however, the Virus will likely not end abruptly, so investors should expect markets to be more reactive as its effects recede in the short term.
INFLATION & RATES
The United States’ 20-year average headline inflation rate is around 2.1%. The current headline rate is at 5.2% . Major contributors are wages, supply chain shortages, and stimulus money (which runs out in coming months). The Fed expects it to settle back to the 2% range in 2022. However, I am beginning to wonder if any of them have bought a tank of gas or a bag of groceries in the last six months. The issue is whether some of the current inflation rate will remain “sticky” going forward and they will not be able to raise interest rates mentioned below.
In its Federal Open Markets Committee meeting in September, the Federal Reserve recognized the U.S. economy may have slow-growth and inflation headwinds. It decreased 2021 growth estimates and increased inflation estimates, though generally remained optimistic for 2022. It signaled interest rate hikes towards the end of 2022 and several in 2023-24. It did not reference aggressive hikes (aka “tapering”), instead referring to gradual hikes (aka “tightening”).
CORPORATE PROFITS
Corporate earnings were decimated in 2020 (-22% for the S&P 500). They have come back to their highest in history in 2021 (+64%), helping to drive forward-looking P/E ratios lower (particularly for blue chip indexes). In 2020, Technology, Communications Services, Health Care and Consumer Staples were little affected as the U.S. and other advanced economies became a more virtual society with lower corporate costs. Going forward, expect corporate profits to remain lower than historical norms due to more moderate growth expectations, increasing pressure on wages and interest rates. Tax policy decisions in the U.S. may also have a short-term negative impact on corporate profits. Despite these challenges, the overall picture for corporate profits is healthy, just with narrower margins and less rapid growth.
EQUITY MARKETS
Our markets have many optimistic themes. Valuation differentials from companies that have participated in stock price increases compared to those who have not is historically high. The spread between the high valuations and the low is very wide. This is a very attractive opportunity for value investors. At the same time, higher inflation, tax policy decisions, and wage increases may slow broad stock price increases short-term. While stock prices may continue upward in a moderated fashion, years like 2020 are unlikely. For the time being, active and value-oriented portfolio management techniques can seek and identify the many winners in the short run.
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THE RISK MANAGER consolidates current information into actionable content designed to help investors navigate risks in the current economic and market environment – from a conservative view. The larger purpose of this work is to optimize financial plans and bring the reader closer reaching long-term life goals.
References
Centers for Disease Control and Prevention (September 30, 2021). Johns Hopkins CSSE. Taken from: https://systems.jhu.edu/
J.P. Morgan Asset Management (September 30, 2021). Guide to the Markets. Taken from:
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