Being Above Average
The transition from summer to fall entails children returning to school, which holds special meaning this year given the challenges with Covid over the past two school years. Overcoming these challenges has proven that the children of Minnesota are indeed above average as has been touted, which from our biased opinion has always been a factual statement. Speaking of averages, we are seeing aspects of the markets and economy that are also above average. Let’s begin with the stock market, specifically the S&P 500 since it is regarded as the most common benchmark used for overall market performance. Over the past three-, five-, and ten-year periods this index has provided average annual returns in the neighborhood of 16-17%, all better than the long-term average of 10%. Some might argue that the market will “revert to the mean” which can either occur via a market pullback or slowly over time with below average returns. Our thoughts are the latter is more likely than the former and we will see a steadily increasing market, albeit at a slower pace than what we’ve experienced over the past decade. Another strong possibility is the long-term average returns of the stock market trend higher given current easy monetary policy and technological advances driving further growth. As a side note, the strong market returns mentioned above include a period of time where economic activity came to a near standstill due to a pandemic which led to a short-lived bear market where stock prices dropped dramatically. This demonstrates the importance of staying the course and adhering to your investment strategy, especially during times of volatility.
Inflation (again) and the Consumer
In what may seem like a broken record, we again want to mention inflation but it is difficult not to since we continue to feel this has the potential to have a very large impact on retirement savings over the next few years. Headlines last week proclaimed the inflation situation was improving since the twelve-month change in the Consumer Price Index (CPI), which is a measure of the prices for consumer goods and services, was below consensus estimates. However, what the headlines overlooked is this change in the CPI level remains well above long-term averages and is at the highest rate since 2008. Core CPI, which removes food and energy since they tend to be somewhat volatile, is increasing at the highest rate in 30 years!
In some good news, retail sales figures for August were released last week and they showed a surprise increase versus an expected decrease caused by concerns about rising Covid cases. This indicates consumers are continuing to spend money and since consumer spending makes up about two-thirds of the U.S. GDP (Gross Domestic Product, which is the value of all goods and services produced within a country) this was a good sign for the economy and points toward continued growth.
Not surprisingly, September has been a somewhat volatile month with the major market indexes taking a breather from their upward trajectory and pulling back from their recent highs. This volatility is typical and not unexpected since historically September is the most challenging month of the year for the stock market. From a historical perspective the last three months of the year tend to be the strongest quarter for the markets. We hope this is the case again this year but with the strong performance year-to-date that may be difficult to achieve. But even if the market is flat or does not live up to historical expectations over the next three and a half months, we will still end the year with above average returns.
Our work of reviewing economic data and studying market themes so we can best position portfolios to protect against risks and profit from opportunities continues. We also endeavor to keep our clients informed of what is happening in the market and how it impacts your portfolio. We are not satisfied with being above average in this regard but rather strive to excel. Please let us know if we can be doing anything differently or if there is any other information you would like to see.
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.
email@example.com Office phone # (952) 460-3260