October 7, 2021
Dear Clients & Friends,
Autumn is my favorite time of the year! The weather begins to cool, the leaves begin to fall, and the sports leagues are in full swing. The autumn season to me represents change. As we can all attest, over the past eighteen months, we have experienced more change than any of us could have ever imagined. Change can be a disruptive force—but it can also bring opportunities. For investors right now, changes are happening all around us, but those changes may set the stage for the next leg higher for this powerful and still relatively young bull market.
The trajectory of the U.S. economy has changed recently due to the Delta variant and related disruptions to companies’ supply chains. According to the Federal Reserve Bank of Atlanta’s estimate, the growth rate of gross domestic product (GDP) for the third quarter is tracking to just 1%, down from 6% just two months ago. However, rather than the start of a downtrend I suspect growth will begin to pickup as more progress is made against COVID-19.
The stock market reversed course last month—which is consistent with historical seasonal patterns—as the S&P 500 Index experienced its first 5% pullback since October 2020. The good news, however, is that the fourth quarter has historically been the best for stocks with an average gain of 4%. As we look to next year, if the U.S. economy produces above-average growth which is the consensus view, double-digit gains for stocks would be a reasonable expectation.
The Federal Reserve may experience a big change early next year. Fed Chair Jerome Powell’s term is up in February and his reappointment by President Biden is not guaranteed. Chairman Powell’s progressive critics don’t believe he is tough enough on the banks, so politics could play a factor is his reappointment. The Fed is also about to start tapering its massive $120 billion per month bond-buying program before it begins to hike interest rates. Change is happening.
One thing we hope does not change is that the U.S. government keeps paying its bills. The debt ceiling, which has been raised 78 times since 1960, needs to be raised or the country could default on its debt—which is inconceivable. As of now, it appears congress has reached a deal to extend the debt ceiling into December. Congress will need to find a bipartisan resolution, but the political game of chicken could cause some market jitters over the next few months.
Democratic policymakers are trying to affect a lot of change with the nearly $5 trillion in proposed spending on social programs and infrastructure. The two proposals will likely be scaled back closer to a combined $3 trillion to secure support from moderate Democrats (there is $1.2 trillion for a hard infrastructure package that has bipartisan support). This spending will come with tax increases to help pay for it, but that won’t stop the federal debt from piling up.
That’s a lot of change. These changes create uncertainty, but they have already been incorporated into market prices. In my opinion, the outlook for the U.S. economy still looks bright. Corporate profits are growing strongly. Low interest rates are supportive, and the worst of the inflation fears may be behind us. My advice to you: embrace the change!
As always, thank you for being my client. Please contact me with any questions.
Nicholas J. Enzweiler is a registered representative with, and securities offered through LPL Financial, member FINRA/SIPC. Investment advice offered through Strategic Wealth Advisors Group, a registered investment advisor. Strategic Wealth Advisors Group and Mercer Partners Wealth Management are separate entities from LPL Financial.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.
All data is provided as of October 7, 2021.
Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.
This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
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