Client Note September 2021

September 30, 2021

Stock markets ended the 3rd quarter of 2021 with a thud as we find ourselves in the middle of a correction. Markets saw the end of a 7-month streak of positive monthly gains.  The SP500 has been up 14 of the last 18 months, and 7 of the last 8.  Looking across asset classes, the SP500 is down 5% for September, and essentially flat on the quarter.  Gold is down 3% on the month, and down almost 1% for the quarter.  The 20yr Treasury bond is down 3.6% on the month and 0% on the quarter.  Small cap US stocks fell less, at -2.9% for September, and -4.3% on the quarter.  Emerging markets lost 3.8% on the month, and -8.6% on the quarter.   This generally flat to negative quarter was anticipated this Spring as economic indicators began to roll over before Q2 was over.  A 7-10% correction should set up a good buying opportunity going into year end.  Year to date gains remain solid.   After this correction completes, I am optimistic for a solid end to the year.

Growth in the economy is still with us, however, at a slower pace than had been hoped for earlier in the year.  Economic data points to a levelling out of growth.  Current GDP, for Q2 2021 is 6.5%, and current expectations for Q3 are just under 5%.  Our real GDP is still a few percent below 2019 levels.  Employment has gained over 2020, but growth in employment has flattened, compared to 2020, as wages rose.  New orders for manufacturing have been level all year after the huge rebound in 2020. 

The levelling off growth, and perhaps the Covid surge in the South this summer, has reduced Consumer Expectations.   The elevated growth compared to 2019 is purely backfilling the Covid recession.  I expect the US to work through the supply chain issues and to add workers at a modest pace over the next year.  Counterintuitively, that may mark the end of this growth cycle as wage pressures and prices decrease, which are dis-inflationary.  That period would be characterized by slowing growth but increasing profits.  That’s still a couple years out though.

Wages were growing at 1% month over month in January 2021, slowed to a negative .43% in March, and picked back up in June at +.43%, and September at +.56%.  Wages are rising at about 5.5% annual rate.  Number of hours worked at 34.7/wk, is the same as it was in January.  2021 is seeing slightly higher hours worked than 2020 (34.6), but much higher than 2019 (34.4).  Finally, the number of employed persons in the US is at 153.15 million.  This is down from 2019 average of 157.62million.  While our population has grown over the past 2 years, there are 4.5 million fewer people working.  What we have is fewer people working a similar number of hours throughout 2021 for higher wages.

If employment and wages continue to gain, we could see persistent inflation.  The core of the current inflation is supply chain issues, simply a lack of goods pushing prices higher.   In addition, the nature of the past recession had a much smaller impact on higher income earners.  There was little displacement of white-collar workers, and thusly, demand for homes and other big-ticket items never receded while factories were idled across the globe.  Prices are higher while less ‘stuff’ is out there, stagflation. Regardless, interest rates have risen and should remain elevated, but may not rise too much further, especially if we see these supply chains get back in line.  The reversal of a trend, like the amount of supply chain chatter in the press, often comes when everyone fully expects the trend to endure.  Don’t be surprised if factories suddenly come back to life early 2022.

How will solid, but slowing growth and tempered interest rates affect the stock market?  Probably in a positive manner.  As long as expectations or hope of increased profits and backfilling the GDP gap from the recession persist, investors will take on risk, and stock prices should climb.   Its when we have ‘fixed’ the last problem AND investors are highly optimistic that actual market risk is around the corner.

Finally, a couple thoughts on the status of Covid 19.  The summer surge we saw in the South and Florida is ending.  Cases and hospitalizations are down dramatically from this recent super peak.  The concern now is for the rest of the country.   Fortunately, a by-product of a Covid surge is that more people get vaccinated and take precautions.  Also, the rest of the country already has a higher level of vaccinations.  While there will be a lot of cases as the weather cools, hospitalizations and deaths should be much lower than we saw in Florida.   As we enter the ‘living with Covid’ era this topic should fade from the headlines.  Schools back in session should allow for more people to go back to work since they wont need childcare as much.  On the other hand, the level of influenza, given we saw almost none last year has scientists concerned that there is lessened resistance to this year’s strains.  Since there is no appetite for large scale closures, anticipate a heightened awareness of flu/covid symptoms and continued efforts to wear masks and social distancing.  If we can have an idea on what to expect, when it happens, it won’t be that much of a disturbance.

Adam Waszkowski, CFA

Advisory and Consulting Services offered through NAMCOA® (Naples Asset Management Company®, LLC). NAMCOA is a SEC Registered Investment Adviser. Information presented is for educational purposes only for a broad audience.  The information does not intend to make an offer or solicitation f​or the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. NAMCOA® has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. NAMCOA® has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments or client experiences.  Please refer to our Firm Brochure (ADV2) for material risks disclosures. Performance of any specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. NAMCOA® has presented information in a fair and balanced manner. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.  Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.  NAMCOA® may discuss and display, charts, graphs, formulas and stock picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested. Please remember that securities cannot be purchased, sold or traded via e-mail or voice message system.  For more information, please visit www.namcoa.com

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Client Note July 2021

August 5, 2021

July saw another positive month for most US equities.  The S&P500 gained 2.3%, led by growth stocks.  Top sectors were technology, healthcare, and utilities.  A return to growth stocks by investors aided technology shares, while a decline in interest rates gave a lift to utilities.   Energy and value stocks were down on the month, alongside emerging market equities.  And finally, large cap stocks dramatically outperformed small cap stocks. Essentially, it’s a moderate investors market.  The riskiest areas, like small cap and emerging markets, after a stellar start to the year, have been very much sideways the past few months, while the broad indexes continue to grind upward.   Energy is similar in having had a dramatic beginning of the year and now, since early June has been consolidating.   I am optimistic that the areas that have been languishing the past few months are near the end of this consolidation and should see higher prices into the third quarter.

Bond prices have generally risen as interest rates have fallen.  Junk bonds were flat while higher quality bonds saw price gains.  Given the weaker small cap performance and junk bonds underperformance, markets appear in a slightly risk-off mode, even as the major stock indexes continue to climb.  This is generally reflective of the doubt regarding the continued rapid economic growth experienced over the past 12 months.  Riskier stock price stopped going up in March, bond yields peaked in May, and only recently we have gotten worse than expected economic data in a lower revision of Q2 GDP growth and a few misses in employment data.  PMI and ISM indicators are meeting and beating slightly, almost exclusively due to ‘prices paid’ factors.  Higher prices are a positive, even if selling a similar amount of product.

Inflation, on a year over year basis is running “hot”, posting a 5.4% (CPI June). CPI for May was 5%. July is expected to be 5.3%.  There are two key items to remember when looking at inflation data.  The US was only starting to come out of lockdowns last summer (case effects) and the federal government was sending checks to all households (direct stimulus), working and non-working.  This glut of cash has caused serious anomalies in the CPI figures.  Used car prices up almost 100%.  New cars up 7% and travel costs up substantially, from depressed levels.  Today, supply chains and businesses have re-opened to a large extent and there are no more checks forthcoming.  I expect inflation numbers to come down substantially for the remainder of the year, which should support bonds, dividend paying stocks and to a lesser extent, precious metals.

Looking ahead, I maintain my upward bias towards stock prices, with the caveat that we will likely see more volatility, 2-4% weekly variations perhaps.   Interest rates could ease further as economic data comes in slower and slower, as we have now passed the peak growth period.  The US economy will continue to expand, albeit more slowly.   If we could see mid- and small- cap stocks do some catching up, it would give me more confidence that financial markets have more room to the upside, but this has yet to take hold.

Adam Waszkowski, CFA

Advisory and Consulting Services offered through NAMCOA® (Naples Asset Management Company®, LLC). NAMCOA is a SEC Registered Investment Adviser. Information presented is for educational purposes only for a broad audience.  The information does not intend to make an offer or solicitation f​or the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and are not guaranteed. NAMCOA® has reasonable belief that this marketing does not include any false or material misleading statements or omissions of facts regarding services, investment, or client experience. NAMCOA® has reasonable belief that the content as a whole will not cause an untrue or misleading implication regarding the adviser’s services, investments or client experiences.  Please refer to our Firm Brochure (ADV2) for material risks disclosures. Performance of any specific investment advice should not be relied upon without knowledge of certain circumstances of market events, nature and timing of the investments and relevant constraints of the investment. NAMCOA® has presented information in a fair and balanced manner. The opinions expressed herein are those of the firm and are subject to change without notice. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass.  Any opinions, projections, or forward-looking statements expressed herein are solely those of author, may differ from the views or opinions expressed by other areas of the firm, and are only for general informational purposes as of the date indicated.  NAMCOA® may discuss and display, charts, graphs, formulas and stock picks which are not intended to be used by themselves to determine which securities to buy or sell, or when to buy or sell them. Such charts and graphs offer limited information and should not be used on their own to make investment decisions. Consultation with a licensed financial professional is strongly suggested. Please remember that securities cannot be purchased, sold or traded via e-mail or voice message system.  For more information, please visit www.namcoa.com