Please note: This update was prepared on Friday, September 17, 2021, before the market’s close.
A recipe for rampant stock market volatility might look something like this: Put a heaping cup of global pandemic into an iron pot, add a dash of the highest inflation in decades, stir in threats of a government shutdown and add pinches of persistent supply-chain backlogs. Heat over a high flame and you get…20 consecutive days without a 1% move in either direction for the S&P 500?
What’s keeping this pot from boiling? The lack of a strong catalyst.
Of all the volatility-inducing ingredients just listed, only the specter of a government shutdown is new to the market stew. Unfortunately, a potential government shutdown over debt-ceiling extensions isn’t unprecedented. In fact, with an increasingly divided government turning the debate over the debt ceiling into political weaponry, we may see them arise more frequently in the future.
History, however, would suggest that for all the bluster, a debt-ceiling showdown is little reason to worry about the stock market.
Rather than focus on Washington, it’s better to cast your eye on the economy and consumers. Despite this week’s stronger retail sales report and slowing inflation, the U.S. economy is still digging out of its COVID-19-created hole. Fewer people are employed today than in 2019 and GDP is smaller than it would’ve been absent the last year’s shutdowns. Inflation remains elevated, and global supply chains are only slowly mending their broken links. The daily high-frequency data we follow—people eating out and traveling—has ticked lower as delta-variant concerns have risen.
All of this makes the stock market’s ability to sustain 2021’s strong gains seem even more remarkable, though the longer we go without a pullback, the more likely one becomes. As we’ll discuss below, the foremost concerns on investors’ minds this week—inflation, corrections and government shutdowns—may be oversimplified.
Inflation Cools, Consumers Continue to Spend
The August consumer price index (CPI) report shows that overall costs to consumers rose 5.3% from the same time last year—higher than anything we’ve seen in decades but slightly off the 5.4% pace from earlier this summer. The 0.3% increase from July was the lowest rise in seven months and a significant slowdown from June’s 0.9% climb.
Even better, inflation uncertainty hasn’t stopped consumers from spending: Retail sales were up 0.7% in August from July. And this isn’t a one-time trend—not only was the August retail sales number significantly better than a year ago, when the country was in a quasi-lockdown, but it’s also notably higher than pre-pandemic August 2019. Even with inflation factored in, consumer spending is something to celebrate.
Yet, a key question remains: How far will inflation recede and how quickly will it happen?
As we touched on several weeks ago, we think the shelter component of CPI, also known as owners’ equivalent rent (OER), which makes up just under 25% of the index, is likely to keep inflation gauges higher than we’ve been used to. Why? Despite the fact that home prices have been rising steadily, OER has historically lagged price gains by as much as 15 months. We believe the OER component will continue to bedevil the overall inflation gauge.
Meanwhile, the pandemic’s disruption continues to hinder the global supply chain, creating skyrocketing shipping costs and widespread delivery delays.
As a result, mega-retailers are planning ahead: Target, Best Buy, BJ’s Wholesale Club, Kohl’s and Walmart, among others, are stockpiling inventory in advance of the holiday shopping season. As big-box stores slug it out for products, prices are likely to go up, further offsetting the impact of ebbing transitory inflation.
All of that is to say that the days of sub-2% inflation are probably behind us. Whether the pace of inflation has peaked remains to be seen.
Are Stocks in a Correction?
The press has recently been rife with warnings that markets are due for a correction because leadership in the S&P 500 has been concentrated in just a few highfliers. More than half of the companies in the index are in a correction—down 10% or more from their respective highs—hence there’s supposedly something strange going on in the stock market. The implication? With fewer stocks leading the index higher, we’re setting up for an autumn decline.
While we’ve been warning for several months that investors should be prepared for a bumpier ride ahead, it has nothing to do with the issues being promoted in the press.
As researchers at BMO Capital pointed out this week, the current situation is business as usual. Since 1990, whenever the S&P 500 has closed at new highs, typically 55% of the constituent companies have been in a correction. While we continue to believe that an overall market correction is inevitable, it isn’t because the major market indexes are being led by a handful of outliers.
Gaining Ground When Washington Shuts Down
Another hot topic this week is a potential government shutdown as Congress debates whether to raise the debt ceiling.
Moody’s Analytics estimates that Congress has until Oct. 1 to pass a funding bill to avoid a partial government shutdown; they peg Oct. 20 as “the drop-dead date for raising the debt limit.”
We’re not here to sugarcoat it: Without the ability to continue to raise capital by selling Treasury bonds, the U.S. government defaulting on its obligations would be a game changer for the investment world, damaging our standing on the global stage and our ability to borrow money going forward. We have to assume that Congress won’t let that come to pass.
That said, we’ve seen short-term shutdowns in the past. We may see another in the next month. If it looks like the government is poised to close its doors and furlough workers for a period, is this a signal for investors to get out of the stock market? No.
Government shutdowns aren’t anything new; they happened six times in the 1970s, eight times in the ’80s, three times in the ’90s and three more times in the last decade. Stocks struggled through the 1970s closures; the S&P 500 was down during five of six shutdowns, but the biggest decline was a mere 4.4%. Since then, stocks gained ground 10 of the 14 times the government shuttered. (We’ll leave commentary about investors preferring no government to any government to someone else.)
In fact, the S&P 500 gained more than 10% during the record-long 35-day shutdown from Dec. 18, 2018 to Jan. 25, 2019. All told, over the 20 shutdowns since the ’70s, the S&P 500’s average return was perfectly benign—0.0%.
We’re obviously hoping a government shutdown doesn’t come to pass. But that alone wouldn’t be a reason to reposition your portfolio.
Financial Planning Focus
Protect Your Credit
Credit card fraud is one of the most common types of identity theft. And while a credit freeze is one of the best preventive measures you can take, it may not always be necessary. What is a credit freeze and how does it work? Read on.
A credit freeze simply restricts access to your credit report. Since anyone approving a loan (either via a new credit card or a mortgage) will want to check your credit history and score, this effectively blocks someone from opening new lines of credit under your name.
To freeze your credit, send separate requests to each of the three major U.S. credit bureaus—Experian, Equifax and TransUnion—online or by mail or phone. They will freeze your credit reports and give you a personal identification number (PIN). Existing creditors will still have access to your credit reports, but new creditors cannot view them unless you contact the credit bureau and use the PIN to either permanently or temporarily unfreeze them.
Freezing your credit does not lower your credit score, but it does make applying for a new loan or credit line more challenging, so here are a few things to keep in mind:
A freeze isn’t complete protection. It may not stop identity thieves—yes, it will prevent a thief from opening new accounts under your name, but it won’t prevent fraud on current accounts. If your existing credit card information gets stolen, the thief can still run up new charges. A credit freeze is not a substitute for regularly monitoring your credit card activity.
Act fast. If you suspect you’ve been a victim of a widespread data breach or if you notice fraudulent or suspicious activity on your account, consider freezing your credit before the problem snowballs.
Preventive measures. Monitor your credit card activity and remain wary of suspicious phishing emails that ask for personal data or credit card information. We also recommend requesting your free credit report once a year from each of the three major credit bureaus so that you are aware of any irregular activity.
Alternatives to a freeze. Many incidences of theft are minor and can be handled without freezing your credit—a credit lock or a fraud alert are other less involved solutions. A credit lock still prevents creditors from gaining access to your credit report, but it is less onerous to unlock your credit than it is to unfreeze it. But locking your credit is not necessarily free and it is not government-regulated. Putting a fraud alert on your credit report will alert creditors to take additional steps to verify your identity before approving anything. Among its benefits, a fraud alert doesn’t require you to remember a PIN or take additional steps to lift it—the alert expires after 90 days and can be renewed.
Click here for more advice on how to keep your financial information secure. If you have any questions about credit card fraud or how to best keep a vigilant watch, please contact your portfolio team. We’re here for you.
Strategy Activity Update
Please see below for a summary of the trades we executed over the week through Thursday and our current tactical strategy allocations.
The Federal Reserve’s two-day meeting next week followed by Chair Jerome Powell’s press conference will be in the spotlight, so expect inflation news and views along with tapering taper talk to be amplified.
We’ll also get reads on the inflated housing market (homebuilder confidence, permits, housing starts, existing and new home sales), as well as manufacturing and service sector purchasing managers indexes.
As always, you can visit www.adviserinvestments.com for our timely and ongoing investment commentary. In the meantime, all of us at Adviser Investments wish you a safe, sound and prosperous investment future.
Please note: This update was prepared on Friday, September 17, 2021, before the market’s close.
This material is distributed for informational purposes only. The investment ideas and opinions contained herein should not be viewed as recommendations or personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.
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