Summer is officially winding down, but you’d never know it from all the heat and storms we’ve had. The very low volumes on the New York Stock Exchange recently are a reminder of all of the investment professionals that are taking summer-ending vacations, so I’d expect volume—and possibly volatility—to pick back up when they return to their offices.
Historically, summer is a slow season for investing. That wasn’t the case in 2021, as the S&P 500 is up about 7% over the past quarter. The autumn months of September through November have historically provided better gains than summer, but often bring volatility. We probably all remember or have heard of the market crashes of 1929 and 1987, both of which occurred in October, and there were several years in a row in the late 1990s that had big October corrections.
So, what’s on the horizon this year that could lead to increased volatility? I think that Federal Reserve talk around “tapering” has the greatest likelihood of creating a stir. As you may know, the Federal Reserve has been buying billions of dollars worth of bonds since the quarantine period began. It has done this in an effort to “grease the wheels” of the financial system, making sure that there is plenty of liquidity to allow businesses the opportunity to grow. In my opinion, all of this liquidity is behind the rapid rise in stock, commodity, and real state prices over the past year. So, if the Fed begins to taper its bond-buying, it stands to reason that there will be less cash in the financial system. Less cash could lead to less demand for stocks, bonds, commodities, and real estate, which could in turn lead to lower prices for assets, or at least a slowdown in the rapidly rising prices of assets.
Why, then, would the Fed start to taper? Most likely, it is to make sure that the economy doesn’t start running too hot with all of the cash being deployed. An overheated economy can lead to inflation, which, while helpful when under control, can be bad for the economy and financial markets if it gets out of control. Like me, you’ve probably noticed the higher prices you’re paying for almost everything today compared to a year ago, which is a sign of inflation. I think the Federal Reserve will want to make sure that there is not too much more, which is why it would want to start tapering bond purchases.
There are many strategies that can be used to hedge such an event, and we would be glad to discuss them with you. We are not going to jump the gun, though, since many fundamental factors still favor stocks. Earnings season finished well ahead of expectations for the fifth quarter in a row, and upside remains possible for future estimates. Also, profit margin estimates have held steady at record high levels despite the ongoing pressure of supply chain shortages, as demand remains high. Therefore, we believe there will be time to adjust to a shift in Fed policy. Often, the early stages of liquidity tightening are met with rising stock prices, although there is usually a shift in the types and sectors of stocks that outperform. Yesterday’s losers may become tomorrow’s winners
Don’t forget that estimated tax payments are due in mid-September, if that applies to you. Also, the deadline to establish SIMPLE IRAs and Safe Harbor 401(k)s for your company is approaching, which we can help you with. Lastly, October 15 will be here before you know it, so please make sure you’ve filed your income tax return by then if you were issued an extension.
It might be the end of the summer season, but it is the beginning of football season, and I can’t wait!
As always, these opinions are mine, and may or may not be the same as those of Raymond James. This is not a solicitation to invest, although we do invite you to review your portfolio with us to see if any changes should be made.
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