Please note: This update was prepared on Friday, September 3, 2021, before the market’s close.
Maybe the economy isn’t recovering as fast as economists and policymakers believe.
Job creation slowed dramatically in August, with just 235,000 new jobs created—a far cry from the 720,000 economists had anticipated and, we hope, not an omen of a greater economic slowdown as we start the long Labor Day weekend.
The deceleration means the Fed is unlikely to take its foot off the easy-money gas pedal anytime soon. Likewise, the news is unlikely to impede the stock market’s momentum given traders’ zeal for a supportive central bank.
Traders shrugged off other signs of economic inertia this week—including sinking consumer confidence and lingering inflation headwinds—to propel the S&P 500 to its 54th all-time best of the year yesterday, the latest gain in a summer notable for its lack of market volatility amid seismic geopolitical, epidemiological and environmental events. From Memorial Day through Labor Day (the market is closed on Monday), the S&P 500 was up 8.3%, widely outpacing the 1.3% average during that period.
Including dividends (and we will, because dividends matter), the S&P 500 hit 409 highs since the end of the 2008–2009 financial crisis and 81 since the end of the 2020 pandemic bear market.
The S&P 500 has posted consecutive monthly gains from February through August and hasn’t experienced a drop of more than 5% since November. As we’ll discuss below, this is a perfect time to reexamine your risk comfort zone.
Hurricane, Housing May Prolong Inflation
Our thoughts are with everyone impacted by Hurricane Ida after its destructive path through New Orleans and up the Eastern Seaboard. The human toll is devastating and the structural impact gigantic and complex.
While there’s no salve for the loss of life, the aftermath of such an event often has an economic silver lining—a surge in residential and commercial construction. But this year, supply disruptions and materials scarcity could usher in reinflated prices for both as well as extended delays for parts and labor for rebuilding everything from damaged roofs to transportation hubs.
This could propel the already exorbitant costs of new home construction and renovations on existing houses even higher—another potential economic setback. In fact, Ida’s damage may be extensive enough to prolong inflationary pricing pressure on goods and services, as well as fuel prices, which could weigh on consumers’ confidence and hamper their ability to spend freely in the near term.
This week’s Case-Shiller report, which tracks the value of single-family residences, showed June home prices up 18.6% over the past year. June was the 13th consecutive month of accelerating prices nationwide.
Persistently soaring home prices may be the result of the pandemic-inspired urban flight to the suburbs or merely an acceleration of trends that we would be seeing anyway as baby boomers downsize and millennials enter their homebuying years. We’ll know more as the economic data begins to smooth out after the tumult of the pandemic shutdowns.
What is more certain is that housing has the potential to keep inflation elevated well into 2022. While transitory inflation pressures from rising energy and used car prices should start to let up early next year, the “shelter” component of the consumer price index (CPI) will be tougher to tame.
At just under 25%, the metric known as owners’ equivalent rent (OER) has a large impact on the CPI, the “headline” inflation rate. OER is calculated as the rent a homeowner would have to pay to match their total costs of homeownership (mortgage, taxes, insurance, etc.).
OER has historically lagged the Case-Shiller price index by 15 months. Based on the chart below, you can see that housing inflation is in the very early stages of climbing to match home prices. If history is a guide, OER could prove a rising offset to other transitory inflation measures in the months to come.
If housing prices contribute to higher-than-expected inflation, the Fed could be more aggressive in applying the brakes to the economy, prompting concerns of slower economic growth. Policymakers will continue to weigh that decision against the state of the job market, which, as noted above, has not recovered as swiftly as many had hoped.
Stock prices may be at an all-time high but dividends have yet to reach their pre-pandemic peak, and futures prices indicate that investors won’t see their payouts return to prior levels until early 2022.
According to Standard & Poor’s, the S&P 500’s second-quarter dividend payout was $14.58 per share, 5% shy of the 2020 first-quarter high of $15.32. It’s easy to see why this would be frustrating for investors reliant on dividend income, especially since the cost of goods and services is up 5.5% over the same period. Inflation rising faster than income is a recipe for instant noodles at home instead of steak dinners out on the town.
But if the futures markets have it right, the dividend drought may end before March 2022. The Chicago Mercantile Exchange maintains futures contracts for S&P 500 quarterly dividends—and based on these contracts, investors are anticipating quarterly dividends will hit new highs by the first quarter of 2022, two years after the last peak.
While the S&P has hit 81 new highs since the 2020 bear market, dividend growth is still playing catch-up. The dry spell may last for several months, but the end appears to be in sight.
Setting Expectations for the 4th Quarter
Over the past 60 years, the S&P 500 has gained an average of 2.1% during both the first and second quarters and 0.4% in the third quarter. The fourth quarters have historically brought the biggest average gain—3.7%.
Of course, you’ll probably recall it was just 2018 when stocks took a 13.5% dive in the year’s final quarter. Averages are just that…averages.
October through December 2021 could be fantastic. Or it could be a time when the reality of slowing economic and earnings growth begins to worm its way into traders’ minds. One barometer we monitor is an Atlanta Federal Reserve model that factors in data as it comes in and projects economic growth on a quarter-to-quarter basis. Over the past couple of weeks, that model has gone from predicting a 6.2% annualized GDP growth rate to 3.7% for the third quarter—that’s quarterly growth of a mere 0.9%. Growth, sure, but not fast growth. The question is whether earnings will follow the same trajectory.
We’re not saying a decline is imminent. But the string of all-time highs in the stock market makes this a good time for a gut check and a review of your portfolio. Stocks don’t climb to the sky uninterrupted. 2021 has seen a remarkably steady ascent, during which the S&P 500 has yet to experience a meaningful pullback. (On average, the index drops 14% at some point every year.)
Even if we’re headed toward what has historically been the best quarter for stocks, and your portfolio may be at levels you’ve never seen before, we don’t measure investment success by the highest points but by defending gains that could be as ephemeral as a summer breeze.
Here’s an easy thought experiment for you: Divide your portfolio’s value by five; each fifth represents 20%. Now subtract one of those fifths from your portfolio’s current balance. While markets tend to go up over time and long-term opportunities are found when markets fall by 20%, are you comfortable with that kind of drop in the short run? Or would you be losing sleep and thinking about rebalancing only after a 20% decline? If so, now is a good time to reassess your comfort with stock-market risk and consider adding more defense to your portfolio.
Financial Planning Friday
5 Savvy Financial Moves for New Parents
Major life events can provide the impetus to create or revise your financial plan—and few events are bigger than welcoming a new child. Here are five action items to consider, whether you are a new parent, expecting or simply playing catch-up with your planning:
Get your child a Social Security number. You’ll need one to add your child to your health insurance, claim them as a dependent on your taxes or establish a college savings account in their name. Your hospital should provide you with the necessary paperwork for a newborn. For adoptees, your adoption agency should be able to help.
Add your baby to your health insurance. In all the excitement and stress that comes with growing your family, you won’t want to forget this one. Once your baby is born, you have a 30-day window to add the little one to your health insurance coverage. Notify your employer’s HR department or your insurer as soon as possible.
Review your other insurance coverage. Even if you already have life and disability insurance, you may need to update those policies. Disability insurance can help replace at least a portion of your salary if you are unable to work, and life insurance can provide for your loved ones’ futures if the unthinkable happens.
Begin budgeting (if you haven’t already). Baby budgeting means more than just adding diapers to the grocery list. Insurance, clothing, childcare and education are among the other expenses that factor in. Consider saving for your child’s future education with a tax-free 529 plan. Finally, be sure to continue making regular contributions to your retirement and investment accounts. Here’s our Budget Worksheet to get you started.
Update your estate plan. To ensure that your child will be well cared for if something unexpected were to happen to you, you’ll need to update your will to reflect your wishes, designate a guardian and leave clear instructions for your child’s inheritance. After your baby is born, you’ll also want to consider updating your beneficiary designations to include your child on your various financial accounts.
This list is by no means exhaustive; for more detail, please read our Financial Checklist for New Parents. Of course, if you have any questions about your specific situation, please contact your portfolio team. Remember, we are The Planner You Can Talk To.
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.
No trades this week.
AIQ Tactical Global Growth
Sell Fidelity MSCI Utilities Index ETF (FUTY). Buy Fidelity MSCI Communication Services Index ETF (FCOM).
Markets and Adviser Investments’ offices will be closed Monday in observance of Labor Day. We’ll be back at our desks Tuesday morning.
Next week is light on data, but we’ll still get useful reads on job openings and inflation as well as the Federal Reserve’s “Beige Book” of anecdotal economic reports from around the country.
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 3, 2021, before the market’s close.
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