A Tale of Two Markets
A few weeks ago, investors were dealing with elevated volatility and downward pressure in the stock market. September went down as the worst month for the S&P 500 since March of last year when the pandemic descended upon the globe. Now, a few short weeks later, sentiment has turned positive and the markets have rebounded, once again trading at all-time highs. What changed during that time? Really not much…..
The market pullback a month ago was blamed on a rise in interest rates attributable to concerns about the Federal Reserve tapering their bond buying, fears of contagion from troubles in the Chinese real estate market, a growing number of coronavirus cases, political debate in Washington around the debt ceiling and spending proposals, and a rise in inflation. These issues remain, yet investors no longer seem concerned. Granted, the debt ceiling issue was temporarily resolved and there is progress around the spending proposals; however, all else remains the same. There was one trigger beginning in mid-October that helped push stock prices higher – earnings. Earnings reports began in earnest last week and in many cases exceeded expectations, reflecting continued growth in corporate profits.
We encourage investors to tune out the extraneous noise, which does not affect the stock market and instead look at what truly does matter – earnings and the overall health of the economy. In that regard, all appears to be fine and there is reason to believe the stock market is once again showing strength. Those investors who maintained a long-term view and were not caught up in short-term noise were rewarded for their patience. The stock market is up over 5.5% in the month of October.
Speaking of the economy, the focus remains on inflation with little doubt that inflation remains persistent and looks to continue into at least the foreseeable future. One of the worries currently garnering attention is a possible return to 1970’s style stagflation – inflation without growth. That time was also characterized by high unemployment, which is not the case today as unemployment is relatively low and continues to fall. Moderate inflation can be good for the economy if it is accompanied by growth. At this point, all indications are the economy is continuing to grow, but there are a few signs of slowing. The various measures of economic growth show very strong growth over the past several months due to the year-ago comparisons when the economy was re-opening. All indications reflect the economy remains on solid footing and if it is slowing, only from high levels.
The largest driver of the markets over the next week will likely be earnings announcements and we anticipate strong earnings to continue, which should help fuel further stock market gains. We also continue monitoring the infrastructure and spending bills in Congress, especially how the revenue will be raised to pay for each (i.e. taxes).
Many of the proposals for tax increases from Democratic Congressional leaders have been scaled downwards due to vocal opposition from within their own party. The size and scale of the original proposals reached well into the trillions of dollars to be funded by the American taxpayer. Regardless, even though the total price tags on these spending bills are decreasing they remain extraordinarily large and require funding, which could only be reasonably found in material and sweeping tax increases and/ or increasing the overall national debt.
If you are interested in discussing how taxes could impact your retirement and how we might reduce the effect Uncle Sam has on your hard-earned savings, please give us a call to schedule a planning session to review your individual situation.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
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