The third quarter was a mixed bag of market and economic news. By the end of quarter two, stock market optimism was riding high on the heels of corporate earnings and the belief that rising prices were, in the words of our Fed Chairman, “transitory”.
In fact, in quarter-two every market index was positive, including the U.S. Bond market. That doesn’t happen often and was especially unusual considering the Covid-19variant was running rampant. We know, one quarter does not a-market-make. During July and August things seemed to be continuing their “grind up”. And then, the wheels came off in September.
The S&P500 posted a minus 4.8% return in one month, wiping out most of the gain of the prior two months. Interest rates started rising in September, driving the value of bonds downward. International markets were reeled on the thoughts that inflation might not be so transitory after all. One of the largest property developers in China defaulted on their interest payments, and the truth about the devastation in international supply chain operations (computer chips, appliances, raw material shortages, port congestion, trucker shortage) was causing some panic.
The Fed signaled it will start slowing the purchase of U.S. bonds, thus reducing the overabundance of cash in the U.S. Economy. At least half the Fed Governor’s now think an interest rate rise might be warranted in 2022. Oh yes, and Covid was still running rampant.
So why hasn’t the big correction happened? It seems investors still have a tremendous appetite for “buying (stocks) on the dip”. It’s hard to tell if this is coming from institutional investors or the millions of new retail investors who opened brokerage accounts since the start of the pandemic.
Two sentiments I wrote about earlier this year, “TINA” and “FOMO” are alive and well. Many investors believe “there is no alternative” (to stocks), in this low-yield bond environment, others have a terrific, “fear of missing out” (on the next leg up for stocks). Neither is a good reason for taking outsized risks in an overvalued stock market.
Just how bad supply chain woes have gotten will be known in the first few weeks of October when companies, large and small, report Q2 earnings. In the meantime, it’s a great time tore-evaluate one’s tolerance for risk and whether TINA and FOMO are driving your feelings about what should be done in your portfolio.
I think my next article will be on “goal-based investing”. It’s about measuring the success of a portfolio based on achieving a certain goal vs. beating some arbitrary benchmark or comparing portfolio returns amongst golf buddies.
These are stressful times, in and beyond markets. I encourage you to bring your questions, fears and wonderings. As Mr. Rogers said, “if you can mention it, you can manage it”.
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