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Key Points for the Week

  • Equity markets wrapped up the worst month of the year. Interest rates, inflation concerns, political disagreements, and developments in China all weighed on equities in September.
  • August core PCE (Personal Consumption Expenditure) rose 0.3%, but the rate of increases continues to moderate. Energy and food are still driving headline inflation figures.
  • Legislation was signed Thursday evening, September 30th, to avoid a partial federal government shutdown, keeping the government funded through December 3rd.

If you look back over the last 20 years, September has been the worst performing month for the Standard & Poor’s 500 Index, according to Nasdaq.

This year, the S&P 500 dropped 4.8 percent in September. That wasn’t enough to wipe out gains from earlier in the third quarter, and the Index finished the quarter slightly higher. The Dow Jones Industrial Average and the Nasdaq Composite Index also tumbled in September. Their losses erased the previous two month’s gains, so the Dow and Nasdaq finished the quarter lower than they started it, reported Caitlin McCabe and Caitlin Ostroff of The Wall Street Journal.

Investors had a lot to consider during September and over the third quarter, including:

  • Resurgence of the coronavirus. On July 1, the seven-day moving average of coronavirus cases in the United States was about 14,500. Early September, the average had rocketed to about 170,000. By the end of September, the average was trending lower, reported the Centers for Disease Control.

One result of COVID-19 is that life expectancy for births in 2020 dropped from 2019. In the United States, life expectancy at birth has fallen by more than one year. Italy, Poland and Spain also have seen life expectancy drop by more than one year, reported The Economist. Lifespan increased in two countries: Denmark and Norway.

  • Global economic growth concerns. The resurgence of COVID-19 also dented global business executives’ confidence that the world economy will improve during the next six months, according to latest McKinsey Global Survey. While the majority (71 percent) of those surveyed said that economic conditions will improve in the coming months, the number was lower than the prior quarter’s 81 percent. Survey respondents said the top risks to economic growth were the pandemic, supply chain disruptions and inflation.
  • Supply chain disruptions. The supply chains issues created by the pandemic have not been easy to resolve. David Lynch of The Washington Post reported:

The commercial pipeline that each year brings $1 trillion worth of toys, clothing, electronics and furniture from Asia to the United States is clogged and no one knows how to unclog it…the median cost of shipping a standard rectangular metal container from China to the West Coast of the United States hit a record $20,586, almost twice what it cost in July, which was twice what it cost in January, according to the Freightos index. Essential freight-handling equipment too often is not where it’s needed, and when it is, there aren’t enough truckers or warehouse workers to operate it.

David Lynch, The Washington Post

Toward the end of September, more than 70 container ships were anchored near the West coast, waiting for a berth to open so goods could be delivered.

  • Rising inflation. The cost of producing goods has been increasing. “The producer price index, a proxy for corporate or wholesale costs, has risen for eight months in a row and, in August, was up 10.5% from a year earlier, the highest reading since June 1981. Compare this to the consumer price index, a proxy for realized manufacturer or retailer prices, which was up 5.3%. This 5.2-percentage-point gap is one of the largest in more than 40 years, suggesting higher costs are outpacing merchant end-prices…,” reported Lisa Shalett of Morgan Stanley. When producer costs rise faster than consumer prices, companies’ profitability may drop and that could negatively affect earnings.
  • Tightening central bank policy. The Federal Reserve is concerned about inflation, too, and is considering a move toward less accommodative monetary policy. In late September, Federal officials indicated that tapering – slowly reducing monthly purchases of securities – could begin later this year. Once purchases have ended, the Fed could begin to raise interest rates in late 2022 or 2023, depending on how the economy is growing, reported Jonnelle Marte of Reuters.

As if these issues weren’t enough, investors also had to process the potential effects of a global energy crisis, China’s regulatory crackdown, and another U.S. debt-ceiling standoff.

This Week in the Markets

Equity markets struggled in September as interest rates, inflation concerns, and developments in China all weighed on stock market averages. The S&P 500 surrendered recent gains as large-cap growth companies led the market lower. Large-cap growth has been the top performing style box since the beginning of the second quarter.

Inflation continues to show signs of moderating in the U.S. while remaining above pre-pandemic levels. Yearly inflation inched higher. The last two months have increased 0.3% (3.7% annualized), which is faster than before the pandemic but slower than earlier this year. We continue to anticipate inflation running at 4-5% over the next 4 to 5 years.

As expected, lawmakers reached a compromise to avoid a partial government shutdown. We expect to see continued brinkmanship on key issues. Democrats also continue to work on cobbling together majorities for infrastructure and spending bills.

The S&P 500 sagged in a volatile week and had the largest weekly dip since late February. Concerns about increasing long-term interest rates contributed to the slide. The Bloomberg U.S. Aggregate Bond Index added to last week’s losses. The September employment report leads a list of economic releases this week.


The pandemic accelerated the adoption of autonomous checkouts at retailers. Some stores have self-checkouts, while others have installed a “combination of sensors, cameras, computer vision and deep learning” that makes it possible to eliminate cashiers and checkouts entirely, reported Anna Oleksiuk on the Intellias blog.

At the other end of the shopping-experience spectrum is the “Kletskassa,” also known as the “chatty checkout,” which was implemented by a large grocery store chain in the Netherlands. It’s a checkout line that promises conversation with the cashier.

1.3 million people in the Netherlands are older than 75 years – and one large supermarket chain is making sure they’re not getting too lonely in their elder years. The Dutch government with its campaign, ‘One Against Loneliness,’ has galvanized organizations, towns, companies, and individuals to find solutions. The [grocery store chain] is doing their part with its innovative chatty check outs.

The Good News Network

The slower, chatty lane was developed specifically for older citizens, but may appeal to a much wider group of people on days when they have the time to engage.

Risk On

Traders sometimes use the phrases “risk on” and “risk off” to describe trades or positioning designed to profit from market rallies or protect from market declines. But the reality is risks are always present and predicting short-term market moves is extremely difficult.

While risk is constant in the markets, portfolios face greater risks at certain times. Being prepared can reduce the odds of a rash move to lower risk when the market declines. Identifying specific risks also helps to keep them top of mind and balances the temptation to chase higher returns.

Each quarter we analyze the five key risks in the market and provide a summary of why those risks were added or retained on our list. Today’s update shares our current list of key risks.

  • Virus variants: A restaurant with empty tables used to mean no wait time. Today, half the tables can be empty, and you can still wait an extra 20 minutes. The Delta variant has slowed the willingness of workers to return to the workforce. The variant is highly transmissible, and some studies have shown waning effectiveness of vaccines against it. Our top risk is the next variant which could prove to be more challenging.
  • China: Last week’s incursion by the Chinese air force into Taiwan’s defense zone and recent concerns about property developers in China are just two ways the Middle Kingdom is contributing to market risk. China is the world’s second largest economy and the largest market for several key industries. It also plays a crucial role in the global supply chain. Any challenges coming from China are likely to affect the rest of the world.
  • Policy mistake: The risk of a policy mistake remains in our top five but has likely lessened. Third quarter economic data showed inflation trends are moderating while growth data remain relatively strong. The risk of the Fed being forced to respond to heightened inflation and surprise the markets seems lower. Economic data point to the recovery being strong enough to need less help from the Fed.
  • Supply chains: Shortages from microchips to chicken wings continue to pressure the recovery. Our view is the innovative power of capitalism will overcome these shortages eventually. But any of the previous three risks could trigger additional shortages, whether from fewer new workers, a trade war, or a policy decision that hits a vulnerable industry. The U.K.’s difficulty in finding truck drivers shows how COVID and Brexit interacted to create a much greater challenge than expected.
  • Investor behavior: The third quarter marked the sixth straight quarterly increase in the S&P 500. Stock investors have done well, and the market has rewarded those who pushed the risk envelope. In the third quarter, the S&P 500 only increased 0.6%. Those returns were better than bonds and cash but may not be enough reward for the additional risk borne by stock investors.

We remain concerned about the toxic political climate in the United States. We do not list it as a top 5 concern because we believe that some of the drama is for theatrical effect and compromise or resolution will occur.

We are concerned that many investors have left themselves emotionally vulnerable to a market pullback that may exacerbate a moderate decline. At the same time, history has taught us most market risks are either managed, mitigated, or innovated away and that an optimistic outlook remains the most prudent. Please work with your advisor if you are concerned your portfolio reflects too strong a tilt in either the “risk on” or “risk off” direction.

Pending Tax Law Changes

The current debate over the Infrastructure Bills is not yet over and many of the proposed tax proposals may be amended or dropped before the Bill becomes final. Here are some of the tax changes being considered:

  • Increase the top income tax bracket to 39.6% (for taxpayers earning more than $400,000 ($450,000 on a joint return)
  • Increase the capital gains tax rate to 25%
  • Add a 3% surtax on those taxpayers making over $5,000,000
  • Tax unrealized capital gains at death (currently these gains are not taxed) for those decedents whose unrealized gains exceed $1,000,000
  • Limit tax deferral though 1031 exchanges
  • Expand the Child Tax Credit and make it refundable
  • Creation of a vehicle mileage tax
  • Increased tobacco taxes

Did you Know? This Week in History

October 6, 1866: The Reno Brothers Carry Out the First Train Robbery in U.S. History

On October 6, 1866, the brothers John and Simeon Reno staged the first train robbery in American history, making off with $13,000 from an Ohio and Mississippi railroad train in Jackson County, Indiana.

Trains had been robbed before the Reno brothers’ holdup. But these previous crimes had all been burglaries of stationary trains sitting in depots or freight yards. The Reno brothers’ contribution to criminal history was to stop a moving train in a sparsely populated region where they could carry out their crime without risking interference from the law or curious bystanders.

Though created in Indiana, the Reno brother’s new method of robbing trains quickly became very popular in the West. Many bandits, who might otherwise have been robbing banks or stagecoaches, discovered that the newly constructed transcontinental and regional railroads in the West made attractive targets. With the western economy booming, trains often carried large amounts of cash and precious minerals. The wide-open spaces of the West also provided train robbers with plenty of isolated areas ideal for stopping trains, as well as plenty of open spaces where they could hide from the law. Some criminal gangs, like Butch Cassidy’s Wild Bunch, found that robbing trains was so easy and lucrative that for a time they made it their criminal specialty.

Weekly Focus

It’s hard to be a diamond in a rhinestone world.

Dolly Parton, Singer and Songwriter

What makes a nation great is not primarily its great men, but the stature of its innumerable mediocre ones.

Jose Ortega y Gasset, Philosopher and Essayist