“What to Expect”
Here is my September markets newsletter for you.?I wrote this last week but just got it back today with the ok to send. After today’s drop, sorry it’s late.
Interesting happenings with Evergrande in China adding to the sour market mood. It’s one of the largest real estate developers in China and heavily in debt and that’s rippling into worries from the Delta virus, Federal Reserve interest rate moves, rising inflation, market valuations and supply chain issues mood. Our economy is doing well, but it’s starting to strain, hopefully short term.
If you would like to chat about anything here, please reach out at any time. I’ll probably have another update for you pretty soon!
?“What to Expect”
?In 1986, the author Sandee Eisenberg Hathaway, Heidi Eisenberg Murkoff and Arlene Eisenberg wrote a book that has sold (through many updates) over 22 million copies and is in its 5th edition. In a nutshell, it helps women prepare for what might be expected as they go through pregnancy, which can sometimes be straight forward as well as difficult. The title is “What to Expect When You’re Expecting”.
?How apropos for what both the stock and bond markets are trying to understand as we see valuation extremes in equities and large uncertainties ahead with the Federal Reserve raising rates. One could ‘expect’ the reduction in bond purchases from the Federal Reserve, a process affectionately called ‘tapering’, to be neat, very transparent and orderly, and announced in such a manner as to not disturb stock or bond markets.?
?But to borrow the title mentioned above (which my wife and I both read, and it was great), our industry thinks it knows what to expect with this regime change into higher interest rates from lower rates. Analysts think we know the path forward, but that uncertainty of what to expect from the Federal Reserve is high… will they start tapering and announce it on the 22nd of this month, or, will they start to do so in their November meeting.?What can we expect from them and how will the markets react??
?As an update, S&P500 earnings for the 2nd quarter came in +93% when compared to Q2 of last year, and that’s massive (norm is in the +10% to +20% range). Yet, even with that massive E (earnings) number, the P/E (price/earnings ratio) for the S&P500, which was at 46 before the earnings data started arriving (way high!), has only dropped to 35 and the avg is 15!!?
?One would think a giant E number in the denominator would bring it back down where it belongs, but no. Meaning stock market prices are still way too elevated, which is what I’ve been saying in my newsletters.?Delta variant uncertainty and labor shortages are complicating it even more.
?The negative, bearish industry chatter has become fairly loud of late, (and late to the dance if you ask me). For example:
领英推荐
What’s driving market concerns other than high valuations?
1) worries regarding what will the Federal Reserve do about interest rates this year and how will the market take it, and
2) our national debt limit and the related credit rating for the USA.
3) Delta virus becoming as large an issue as the original
On the credit rating, there’s the $1.5T (trillion) infrastructure package and the proposed $3.5T budget proposal, on TOP of the national debt that’s already ballooned from the big corporate tax cut a few years ago and the Covid relief. It’s no different than you or I being over leveraged when applying for a loan…?our credit score could go down from all that debt, something the markets won’t like any more than the Fed raising interest rates. If the above quotes from all those big banks are right, ok, then where we’re at isn’t justified.?It doesn’t always have to be, but this is way above the din.
What to expect and how those expectations will play out as the Federal Reserve discusses interest rates this week, in parallel to everything else??
Bottom line is that US economics still continues to be better than they were pre-Covid, and corporate earnings came in stellar. However, market risks are still huge and we are expecting the markets to correct this fall. That’s time to go shopping for bargains like I did in Q1 of last year after that market drop.
After that the economy and markets should be back to more normal behavior. I’m bullish on the markets, but longer term, and similarly on the economy.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. No strategy assures success or protects against loss. Investing involves risk including loss of principal.
Just a brief update, and hope this was helpful.
Very sincerely, Ed