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01, November
Goldilocks & The Two Stairs
Market Commentary

Goldilocks & The Two Stairs

Yes, there are two paths you can go by, but in the long run…as we wind on down the road …And if you listen very hard the tune will come to you at last Lyrics, “Stairway to Heaven”; Led Zeppelin
 

An observer of the financial markets, echoing what might be described as consensus thinking, opined “with economic growth weakening and inflation increasing, the risk of a reversal is increasing.” The Wall Street Journal, wishing to add it’s amen to the higher inflation chorus, headlined a story “Inflation is the nemesis of every investor. Here’s what you should be doing to protect your wealth.” The New York Times, also joining those walking up the higher inflation stairs, contributed “The Bond Market Says Inflation Will Last. You Should Be Listening.”

Walking down the inflation stairs has recently become an increasingly lonely journey but there is a law of the economic sort that supports walking in that direction; The Law of Diminishing Returns and, more specifically, how it relates to the most significant economic phenomenon of our time, debt. When debt exceeds a certain level the cost of servicing it exceeds the return it generates leading to lower economic growth rates. The most conservative estimate of the level of government debt at which this occurs is 90%. Its current level is 125%. This may explain the depressed levels of economic growth we’ve experienced thus far in the 21st century leaving our economy 26% smaller than if had grown at the 2.2% annual rate of the prior one-hundred years. Eyeballing a chart of US GDP growth since 2000 shows an economy with peak rates of growth lower than those preceding it and with troughs of growth also lower. Simply stated, as an increasing amount of our more slowly growing national income is diverted to service the ever growing amount of accumulated debt it leaves a lesser amount available to reinvest back into the economy to support economic growth. The classic definition of inflation is too much money chasing too few goods. For the average American too much money isn’t happening.

Longer term we have issues clouding the vistas of our brightening horizon but for the next several quarters perhaps we should place Goldilock’s “not too hot, not too cold” bowl of porridge back on the table. The closing of much of the national economy the past eighteen months dramatically shifted the consumption preferences of US consumers from services to goods, explaining the quantity of Amazon.com boxes on front porches. Unfortunately, only 14% of workers in this country are employed in the goods producing part of the economy. As the services portion of the national economy continues to reopen the employment prospects of our fellow citizens will brighten considerably. Pre-pandemic there were 6 million job openings. Today there are 10.7 million. The component of the Conference Board’s Consumer Confidence report detailing attitudes towards the job market are at near record high levels of optimism. Wages in the United States rose 9.5% year over year in August. So, with incomes set to rise and inflation past its peak and now declining, what’s not to like?

The October Consumer Confidence report revealed that the percentage of consumers expecting higher stock prices was lower than those expecting lower prices for the first time this year. This occurrence in a year in which stock prices are higher year over year has happened only nine other times in the past thirty-five years. In those prior instances the stock market was 6.65% higher three months later, nearly triple the 2.32% average return.

The S&P 500 made a low on October 4th, closing the month +7.6% from that level and +7.0% for the month. The leader of the parade to new highs though was some distance ahead of other markets including foreign emerging markets +1%, foreign developed markets +3.2% and small cap stocks +4.25%. In a market led by, and sometimes dominated by, the ultra big cap tech names, that universe has lost an element of its market leadership as Face Book was -4.7%, Amazon +2.7% (and only +3.5% year to date) and Apple +5.9%. Consumer Discretionary stocks led the market rising 12.1% with 9% of that number explained by Tesla’s meteoric rise of 43.65%. Year to date, the S&P is now +24% with Energy +56.7%, Financials +38.3% and Real Estate +30% notably outperforming. With bonds flat for the month the 60/40 portfolio was +3% for the month and is +11.5% year to date.

 

Mark H. Tekamp/November 1, 2021

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