As we enter the 4th quarter and 2021 comes to a close, it seems there have been plenty of hot topics in the investment world. As our economy continues to fight its way out of the pandemic, headlines related to inflation, supply shortages, and government policy are in the spotlight.
While all of this doom and gloom can be worrisome for investors, the market has managed to shrug off most of these issues and is showing signs of continued growth as we head toward the end of the year. The September meeting of the FOMC signaled that the Fed has taken a more hawkish policy outlook, stating that taping could “soon be warranted”. However, they decided to continue their asset repurchase program until “substantial further progress” is made toward their goals related to inflation and employment. While the dot plot consensus among Fed committee members telegraphs up to 8 rate hikes between 2022 and 2024, timing and frequency is still unclear and the committee is holding their cards close to their chest.
On a related note, “stagflation” is a word that has been tossed around with increasing frequency over the past few months. For those who are unfamiliar with the term, stagflation refers to an economy that experiences two things simultaneously: stagnant economic output and high inflation (hence the term stagflation) usually caused by a sudden shock to supply chains or poor economic policy. This type of environment is feared by investors because it is notoriously difficult to correct. Measures taken to curb inflation typically increase unemployment, while expansionary policy to decrease unemployment will usually increase inflation. This makes the condition difficult to correct, and leads to extended periods of stunted economic growth.
So is the US headed toward a stagflationary tailspin? We don’t think so. Despite pandemic related pressures to supply chains and labor supply across the globe, consumer demand is still high. In addition, supply bottlenecks are slowly fading as global suppliers’ average delivery time has been improving over the course of the year. While we are keeping a close eye on these issues, we expect many of these conditions to improve as vaccination rates increase and more laborers rejoin the workforce.
The debt ceiling has also been in the headlines as politicians dispute whether to raise the limit to government borrowing. Technically, the US reached its imposed debt ceiling on August 1st, but the Treasury has still been able to pay financial obligations by pulling from its General Account. However, this reserve stockpile is projected to be spent down by October 18th, at which point US debt obligations would go unpaid or delayed. While this sounds like a dire outcome, it is unlikely to occur. Although Republicans have stated they won’t budge on the issue, Democrats can circumvent their vote through budget reconciliation. While representatives have still not reached a consensus as I prepare this update (as of October 18th), the House of Representatives was able to pass an extension of the deadline to amend the debt ceiling last week. While this simply kicks the can down the road a few more weeks, Congress has a good track record of meeting important deadlines for such issues and the US has never defaulted on its obligations.
From an investment lens, this could fuel higher volatility over the next few weeks – but is likely nothing more than just another squabble between parties in Washington. With investors grappling with all of the issues mentioned above, you may have noticed the market has been a little more jittery over the past few weeks than we have become accustomed to in the past. Volatility signals investor uncertainty, which can simply be summarized as a wider distribution of possible outcomes (both good and bad). This is not necessarily a bearish signal for the economy, it just creates an environment that rewards well diversified investors with a long term view.
Here at Relevé, we are committed to create broadly diversified portfolios for our clients, and utilize numerous carefully curated holdings in our models that are intentionally distributed across the asset class spectrum. Rest assured, we are actively monitoring the economic environment and making proactive tweaks to portfolios on an ongoing basis based on market conditions. We are thrilled to have wonderful clients like you alongside us, and look forward to 2022 and beyond.
JAKE FROMM | LEAD INVESTMENT ANALYST