Shifting Out of the Summer Vibe

“The most common way people give up their power is by thinking they don’t have any.” 

~Alice Walker, American author whose most famous novel is “The Color Purple”. 

Question:  How did the market perform over the summer? What do you expect as we move into September and the remainder of the year?

Answer: With Labor Day as the official end having taken place, we can pause to see that the equity market did some traveling over the summer. We experienced record highs and rallied over 6% since Memorial Day. This outpaces the 1.3% average return typically seen between Memorial Day to Labor Day since 2000 according to the Wall Street Journal.

No one seemed to mind that we avoided the customary and usual summer slump generally seen during these hotter months. In fact, the S&P 500 has avoided a 5%+ pullback for ten months. This performance has dismissed the market myth that investors should ‘Sell in May and Go Away,’ at least for this year. 

There are still several political and economic events that may lead to increased volatility. The fate of the $1 trillion “physical” infrastructure bill and the $3.5 trillion “social” infrastructure package will likely be determined during the month of September. House Speaker Pelosi set a non-binding date of September 27 (just three days prior to the expiration of the basic transportation spending authorization) for the House vote on the bipartisan, ‘physical’ infrastructure bill. The ‘social’ infrastructure bill will be more contested given the Democrats’ use of budget reconciliation, as they cannot lose a single vote in the Senate or more than four in the House. 

A ‘goldilocks’ agreement on the appropriate size will be difficult to achieve as centrists and progressives’ debate if the spending is too much, risking further inflation, or too little, failing to provide security for those in need. Prevailing opinion is that the total combined value of both packages will be $2 to $3 trillion (not the proposed $4.5 trillion), which may limit the amount corporate and individual taxes increase. 

Complicating matters is the potential for a government shutdown on September 30, 2021, and the ongoing need to raise the debt ceiling. On September 14, 2021, California holds a recall election, and the continuation of Democratic Governor Newsom’s term is a toss-up in the polls. If recalled, there is a growing probability that a Republican could win. While the outcome doesn’t impact D.C., it could be a harbinger of the midterm elections. Although that’s still more than a year away, according to PredictIt, the probability of the Republicans winning the House and Senate are at 71% and 54%, respectively. 

According to NBC, only ~25% of Americans believe the Afghanistan withdrawal was handled favorably. President Biden’s approval rating fell below 50% for the first time and could limit any clout in getting his full domestic agenda (e.g., infrastructure packages) passed. 

The Federal Open Market Committee (FOMC) will meet September 21 and 22. By this time, they’ll have the August employment report which will likely serve as an inflection point for monetary policy. It appears that markets are taking taper talk in stride regarding the reduction of future bond purchases.  

Since their last meeting, the Fed has significantly raised their 2021 economic growth forecast, lowered their unemployment rate target, and modestly raised their core inflation expectations. The updated assumptions, including 2022 forecasts, should give more insights into the timing and pace of tapering. 

Uncertainty surrounding the Delta variant remains leading to thoughts that we could see the Fed remaining patient and not raising rates until 2023.  New COVID cases will need to be monitored as students go back to school and some employees go back to work. 

As reported by the University of Michigan’s Consumer Sentiment Index, confidence fell ~7% in August reflecting concerns around the Delta variant, inflation, wage growth, unemployment, and supply issues. Earnings season for the second quarter of 2021 finished well ahead of expectations. Low interest rates remain as a stimulus along with the fundamental momentum of this recovery. This does not mean that we can take our eyes off the many items on the horizon that may impact volatility such as the tax/infrastructure debate, debt ceiling, bond purchase tapering, the COVID-19 Delta Variant and supply chain concerns. This is why it is helpful to know what you own, why you own it and consult with your financial advisor. Stay focused and plan accordingly. 

The opinions expressed are those of the writer as of August 30, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Past performance does not guarantee future results. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Information has been obtained from sources considered reliable, but we do not guarantee that the material presented is accurate or that it provides a complete description of the securities, markets or developments mentioned. There is no assurance any of the trends mentioned will continue or that any of the forecasts mentioned will occur. Economic and market conditions are subject to change. Companies engaged in business related to a specific sector are subject to fierce competition and their products and services may be subject to rapid obsolescence. Past performance may not be indicative of future results.

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This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email darcie.guerin@raymondjames.com Website: www.raymondjames.com/Darcie.