Where The Market Is NOW Episode 75

It feels like we’re sliding into the end of the year on two wheels, so if you’re uncertain where the economy is hopefully the content below will provide you with clarity.
The third quarter saw records in the markets, but we’ve had pervasive growth concerns. Some pundits predicted double digit growth, but GDP in the third quarter was 6.4%. Not bad, but it wasn’t what most analysts were expecting. So, where are we now that we are about halfway through the fourth quarter?
Joe Biden
Democrats in Congress finally got a $1.75 trillion infrastructure spending bill passed to give President Biden a policy win, but our high levels of spending have already created inflationary pressure on the economy. What will additional spending do?
When the COVID shutdowns happened last year, President Trump, with the Federal Reserve immediately turned on easy money measures, and it appears the spigot was turned on a little too strong. What does that mean?
In order to keep the economy from descending into a deep recession last year, the government began creating $120 billion per month and buying its bonds and buying equities. Also, the Federal Reserve lowered interest rates, which led to greater price increases in things like homes. This liquidity from the $120 billion per month expenditure drove the market back up last year, and is partly responsible for the markets continually hitting all-time highs this year.
This led to the inflationary pressure, which has caused the Federal Reserve to vacillate on when to begin reducing the $120 billion monthly purchases and when to raise interest rates. Remember, it took four years for the tapering process to end after the Great Recession that dipped to its slowest point in 2009.
From Yahoo Finance, “BlackRock Inc.’s Rick Rieder and Allianz SE’s Mohamed El-Erian are among those warning that systemic risks will only multiply, unless monetary officials take more decisive measures to pare extraordinary pandemic stimulus. While policy makers are acutely aware of the dangers in the easy-money era, their accommodative stances are encouraging ever-increasing flows to the riskiest markets.” Federal Reserve Chairman Jerome Powell pictured below.
Jerome Powell, head of the Fed
Last week the Fed announced the tapering would start this month, and they would reduce the monthly purchases by $15 billion per month. Now we’ll wait to see if this causes volatility in the market.
Another challenge we face is a complete Biden reversal from last year when he said nobody would be forced to get a vaccination to it now being mandated. Now a court has ruled to pause the mandate, but the Biden administration is advising employers to continue. This kind of uncertainty is not good for the market. The market likes predictability.
Also of concern is the supply chain issues that may cause delays in having enough products to bring to market in time for Christmas shopping. All while we have 11 million job openings. The enhanced unemployment benefits caused many people to choose to stay home, but as those benefits began to dry up, we haven’t seen a move back to employment like analysts expected.
Couple these things with a few negative news stories, like the botched Afghanistan withdrawal or the border crisis, and there isn’t a lot to be excited about when looking at the fourth quarter.
Surely, a signal that people are unhappy about the state of the economy came last week with the state elections that transferred power back to Republicans in some cases.
An indicator of coming recessions is often rising oil prices. Oil is closing in on a hundred dollars a barrel, which is unbelievable considering just last year it was in the single digits. But here is what is likely to happen, according to Tom Siomades, Chief Investment Officer of AE Wealth Management of which we’re affiliated. Tom is pictured below.
Tom from AE Wealth
The Federal Reserve will begin tapering. Companies will ramp up production to meet the unsustainable levels of demand due to supply chain issues. Employers will begin paying workers more to induce them to come to work.
Prices for consumers will increase, so companies will borrow more. Easy money policies will end, and the Federal Reserve will raise interest rates. And BANG, we’re in a self-induced policy error recession.
What’s worse is it doesn’t look like we’re through making policy errors, and that may stymie a market looking for certainty.
So, what can you do? You can rebalance your equity exposure to make sure it’s within your risk profile. Consider your time horizon and how long you plan to be invested and allow that to inform how much risk you have in your portfolio.
If you have not met with your financial advisor, I recommend calling them and reviewing what you’re doing in light of the information I covered here.
As always, if you are looking for a new or different perspective, I’m happy to meet with you to help you prepare for your future. We don’t look at money by itself. We look at money in relation to what your aspirations are and then figure the proper allocations.
Until next week,
David C. Treece,
Financial Advisor
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