The 18-month market rise after the initial Covid induced selloff of March 2020 finally came to a halt in September as the market sold off sharply. Given that the S&P 500 more than doubled off the bottom of March 2020 to its all-time high in August, the September sell-off of 4.8% was long overdue and could very well have more to go. After the magnitude of the recent market rally, even small issues can spook traders and investors who are looking to book profits and there are potentially meaningful issues that investors are trying to assess.

The Chinese government has been actively regulating their tech industry, for-profit education companies and digital currencies and seem making a serious effort to “redistribute” much of the wealth that has accrued to owners of their technology giants like Alibaba and Tencent. In addition to the government’s heavy-handed approach to the tech sector, a major Chinese real estate developer, Evergrande, was in danger of defaulting on its debt, sending shockwaves through the global markets as investors were trying to gauge whether this could be a Lehman Brothers’ type moment from 2008. China’s economy has been expanding quickly for nearly 30 years and has been a driver of global growth, so any slowdown or evidence of excess in their construction sector, which unlike in the US has been the dominant component of their growth, is worrisome.

At home, government dysfunction, partisanship and obstructionism as Democrats look to pass their large “human infrastructure” package and raise the debt ceiling so we can continue to fund government operations and expenditures (that have already been approved by Congress!!!) is adding uncertainty. As of this writing, it appears that the debt ceiling problem has been punted down the road to be fought again in December. Markets typically react well to nothing getting done (aka maintaining the status quo) which is normal course when no single party holds power over each of Congress, the Senate and the White House.  When one party holds power as the Democrats now do, investors expect proposed plans to move forward. Issues like the debt ceiling need to be addressed and resolved. Also, the bipartisan “hard” infrastructure package to fund our crumbling roadways seems to be held hostage by the larger human infrastructure stalemate.    

Inflation is continuing to be a topic of discussion in the markets as well as the Federal Reserve and interest rates rose sharply during the last two weeks of September which contributed to the fall in tech and other stocks whose earnings are further into the future. There are many factors that are contributing to the continuing inflationary pressures including supply chain glitches, semiconductor shortages, and a tight labor market. Additionally, oil and natural gas prices have moved to recent highs which has highlighted potential dangers as the world transitions to cleaner energy sources. Inflation and employment are the components of the Federal Reserve’s “dual mandate”. Should inflation persist beyond their expectations, the prospect of them reigning in asset purchases and raising the overnight bank lending rate sooner than expected could spook the markets.

Offsetting some of these problems is the fact that investors hold trillions of dollars in cash and since the Covid selloff that cash has been used to “buy the dips”. Also, it seems to me that the Federal Reserve’s main consideration of late is how the stock and bond markets react to their moves. While inflation has been higher than the Fed anticipated, demographics and productivity gains gives them the leeway to push out actions available to them to fight inflation further into the future.

I expect volatile markets during the fall. Market participants seem to come back from summer vacations and try to digest all the economic news. There are traders who are adept at profiting from this volatility by pushing in whatever direction the market is moving which can exacerbate momentum. We are investing for the long-term and stocks and markets at some point return to appropriate valuations. I’ll continue to hold positions and sectors which I feel are significantly undervalued relative to the market and try to add to them when opportunities to buy at an even greater discount present themselves.

I hope you are all staying healthy and enjoying the autumn. Should you have any questions about the attached report, this email, your portfolio, or anything else related to your financial life, my line is always open.

Best regards,

Steve