Equity markets have been resilient through the first three quarters of the year correcting no more than 5% from highs. We attribute much of the strength to unprecedented fiscal stimulus, a very accommodative Federal Reserve, low lending rates, loosening of pandemic restrictions, an improving employment situation, and record flows of new investment into US equities.
Although we remain optimistic on equities over the long-term, we want to remain grounded in knowing that markets cannot go up day after day and week after week. It simply will not happen. Markets have had a record recovery from the COVID lows and have moved on to new highs. But investors should remember that a correction can happen at any time. These corrections are historically very regular and healthy to a bull market, as well as impossible to time.
Elevated inflation and the Federal Reserve announcing the beginning of tapering their monthly bond buying program this year could possibly be a catalyst of a market correction. So too could be civil unrest around the globe, the potential bankruptcy of China’s largest real estate developer Evergrande, or the shocks to the supply chains. The list goes on.
This does not mean that these shouldn’t be of concern, but we choose to look beyond them for several reasons:
- Inflation in a post-recession recovery is historically normal. Runaway inflation should be feared but a moderate increase of inflation is healthy. Companies are able to pass down the increased costs to consumers and ultimately it allows them to raise prices and which directly impact earnings and revenues. Stocks should benefit from moderate inflation figures.
- Federal Reserve has announced that they plan to begin tapering its monthly bond buying program this year and plans at least one interest rate increase in 2022. This news from the latest Fed meeting was met with a cheering market which usually reacts negatively to these announcements. Moderate rate increases means the Fed is pleased with where the economy is and a sign of a healthy economy.
- Job openings data for July showed 10.9 million job openings in America. This equates to 1.3 job openings for every person that is currently unemployed. This is a record high of openings and is likely to remain elevated. As these jobs get filled, there will inevitably be more money spent on consumption.
- Retail sales in July were 17.5 percent above pre-COVID levels in February 2020. This is an impressive increase in sales, considering the past 18 months, and is likely to continue as we roll into the 2021 holiday shopping season.
One can always find a headline to worry about because fear sells. “Bull markets climb a wall of worry.” – a classic stock market phrase cited since the 1950s.
Despite the possibility of near-term speedbumps, we expect the equity markets to continue to grow in a positive direction. We remain focused on strong corporate brands and their long-term record of growing earnings and revenues.
|Thomas A. Toth, Senior
President & CEO