Much to Be Thankful For
This is the time of year when we pause to give thanks for all that we have, which generally include family and friendships, freedoms we enjoy as Americans, and having the privilege of living in one of the most economically developed countries in the world. Here at Secured Retirement, we are especially thankful for our clients and the numerous relationships we have established over the years. We should be mostly thankful for the non-material items in our lives, but would be remiss if we did not give special thanks this year for the great stock market returns we have experienced. This is especially true now since we faced a worldwide pandemic last year which had the potential to devastate many economies and have since recovered with the markets roaring back to above pre-pandemic levels.
With these robust returns, it is imperative that investors take time to review their portfolio positioning and adjust if needed. Many portfolios are now out of alignment with their investment objectives since stocks have had such a vigorous run, subjecting them to excessive risk. It is also important to revisit your personal risk tolerance, including your appetite and ability for taking risk. Many investors have become complacent and feel the stock market will go up forever, but it is inevitable there will eventually be corrections and bear markets. If you are at or nearing retirement, a market downturn could have a significant impact on your savings and adversely affect your income which is why we remain committed to ensuring our clients’ portfolios are closely monitored and adjusted as needed.
The stock markets were generally flat last week, with the S&P 500 and Nasdaq squeezing out small gains while the Dow had a slight loss. The market moving events included retail sales numbers and earnings reports from major retailers, most of which was better than expected and provided a boost for the markets. Consumer spending makes up more than two-thirds of the GDP so the health of the consumer is watched carefully and thus far has held up well. A recent consumer sentiment report was a little weaker than expected so seeing solid retail sales numbers provided relief to the market.
Going into the holiday season, focus remains on retail sales and consumer spending. Indications are that spending will remain strong. One area of concern is that supply chain constraints could lead to a lack of inventory, in turn leading to less spending. Thus far this does not seem to be the case with retailers reporting higher inventory levels than past years but as the holiday season kicks into full gear, inventory levels will be closely watched. Inflation is another risk to spending since consumer prices have increased at a greater pace than wages, but with household wealth increasing as a result of a strong labor market, multiple stimulus payments, and decent market returns, consumers do not seem likely to curtail spending this year. However, higher costs of goods sold could have a negative impact on earnings for some retailers since often they cannot fully pass on higher costs to consumers. This was revealed in some of the recent earnings reports, so while spending may remain strong, corporate profitability growth may experience some pressure.
Elves in the Workshop
The term “stagflation” has been used more commonly in recent weeks with higher inflation readings and signs of the economy slowing. We feel the risks of entering a stagflation environment, characterized by high inflation and slow economic growth, remain low but have increased slightly. As mentioned above, consumer spending plays a major role in the economy and at this time remains brisk, but we also watch other indicators of economic growth such as the labor market, housing/construction data, and production of goods. Last week was heavy with data releases for the manufacturing sector which included capacity utilization and industrial production, which were much better than expected and show the manufacturing sector remains healthy. This reflects strong demand for end products and indicates supply chain issues, while causing some limited access to materials, may not be having as large of an impact as thought on manufacturing.
This week is a short one for the markets due to the holiday and there are no significant economic events. The stock market is open for a shortened session on Friday. Often in the past we have seen some market volatility on Black Friday, but generally on very low volume. Retailers are likely to share details of early holiday-related sales volume, which if is as robust as expected could provide momentum for the markets next week and into early December, as it has in years past. We are long-term investors and do not concern ourselves with short-term market movements, but these are shared as historical reference to be mindful of in the days and weeks ahead. It will have to be seen if we follow such patterns this year.
Time is running out to review your portfolio and income plan, especially if you need to make modifications prior to year-end. If you have not done so recently or would like a second opinion please do not hesitate to contact us. Take time this week to pause and think about all of the things you are thankful for.
Have a very Happy Thanksgiving!
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.
Office phone # (952) 460-3260