Time to Tap the Brakes?

Question: Do you expect financial markets and the economy to slow down this fall?

Answer: The US economy has had its foot on the gas pedal since reopening began last spring. Growth forecasts were   consistently revised higher. Consumer confidence remains elevated as the COVID Delta variant has not curbed consumer spending and the market was full speed ahead during August and so far for September. Investors have grown accustomed to life in the fast lane. Therefore, it just might be time to tap the brakes ever so gently.

Having grown up in New England, learning how to drive in ice and snow was a rite of passage. The lessons were taught in large parking lots after a fresh snowfall, preferably covering a layer of ice underneath. This is where the art and science of successfully maneuvering through a forced skid took place. The experience began by tapping the brakes and sensing how to steer through various circumstances with power and grace. Finesse was required to avoid spinning out of control, oversteering or panicking and slamming on the brakes too forcefully. As with investing, the results depend upon proficiency, competence, aptitude, and external circumstances.

It could be time to think about throwing a caution flag on the track due to critical economic, political, and monetary events on the horizon. These events shouldn’t lead us towards the exit ramp, rather the strong fundamentals suggest patience being a virtue as we may see the economy and equity market regain speed as we go into 2022. 

Fundamental factors support continuation of the bull market and outweigh short-term risks. The Federal Reserve confirmed expectations of growth by raising the 2022 GDP (gross domestic product) from 3.3% to 3.8%. The streak of above-average earnings growth is expected to continue through next year, with 15% earnings growth expectations being nearly double the average for the past 15 years. Equity valuations, although high from a historic perspective, remain attractive compared to bonds.

Federal Reserve Chairman Powell announced that economic conditions warranted the tapering of asset purchases, likely before year-end which provides some guidance and clarity. He also stated that there is a difference between tapering and tightening (raising interest rates) which is an incredibly important distinction. “Tapering” is not “tightening.” Whether or not we receive a tapering announcement in November, it is important to remember that the current pace of Treasury purchases (putting money into the economic system), is for emergency use only, and that the Fed is now positioning support to provide stability. 

Roadblocks could present themselves regarding the Democrats proposed legislation to tie the debt ceiling increase to emergency funding for natural disasters and support for Afghan refugees. It’s expected that cooler heads will prevail, and a government shutdown and debt default will be avoided. Even if there were a shutdown, these have not historically led to dramatic market declines. Since 1980, there have been 15 shutdowns, with the median shutdown lasting only three days. Markets have declined the week before the closure yet have rallied over 3% on average in the 30 trading days afterwards. 

Pent-up demand and a record back-to-school shopping season are additional factors that should carry into record holiday shopping sales numbers. The power of the US consumer is real and should not be underestimated. We are in a seasonally weak period that is followed by what is seasonally the strongest time of year (mid-October through year-end). Ill-timed moves and decisions can be detrimental to a portfolio. As so aptly stated by Levi Strauss, “quality never goes out of style.” Stay focused and invest accordingly. 

The opinions expressed are those of the writer as of September 26, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. There is no guarantee any particular investment strategy will be successful. Asset allocation and diversification cannot ensure a profit or eliminate the risk of a loss. This information is general in nature, it is not a complete statement of all information necessary for making an investment decision and is not a recommendation or solicitation to buy or sell any particular investment. Investing involves risk and the possible loss of principal invested. There is no guarantee any particular investment strategy will be successful.

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. Past performance may not be indicative of future results.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.” This article provided by Darcie Guerin, CFP®, First 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.