Broker Check

Assessing The Wall Of Worry

| August 24, 2021
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The confluence of political and market events over the past few weeks has generated a wall of worry that investors have largely disregarded. The Federal Reserve’s stance on tightening monetary policy, in addition to the delta variant, remains at the forefront of such events. Increased regulatory scrutiny by China on technology firms is also on tap, both for those companies domiciled in China as well as foreign entities operating in China. Short-term domestic economic data releases have further added to near-term uncertainty as the notion of inflationary pressures and short-term economic growth neutrality have surfaced to the top of media headlines. From a broader standpoint, the counterintuitive nature of such a relationship – referring to rising worries amidst rising global equity markets – may appear abnormal, but we urge caution in accepting such a simple narrative.

The recent lack of perceived, and potentially warranted, stock market volatility has yielded the calmest U.S. large capitalization equity market in nine (9) months. The Standard & Poor’s (S&P) 500 has failed to generate a pullback of at least 5% since November 2020. This should not be perceived as an entirely positive occurrence, despite investors’ tendency to associate lack of downside volatility with an utterly healthy equity market. Periodic pullbacks can often establish healthy foundations for stronger and longer bull markets, and we believe the S&P 500 can be a benefactor of short-term volatility. None of this is suggesting that we’re foreseeing imminent or severe downside, nor is that our base-case scenario for stocks. On the contrary, we believe equity market participation remains highly favorable over the next 2-3 years and there’s a tremendous backdrop to support our viewpoint, both from an earnings and economic standpoint. The point we’re trying to convey, however, is rooted in the need to observe the market’s adverse reaction during peak times of perceived stress, no matter how marginal it may transpire. Be that as it may, an argument could be objectively made that the rest of the U.S. equity market has experienced numerous 5% pullbacks this year (small caps and midcaps), as have international markets. This speaks to the fact that the S&P 500 should not be categorized as the sole U.S. equity ‘market’. It is simply one facet of a notably larger set of indices, all of which play a critical role in the long-term management of investment portfolios.

As we look ahead through year-end, and as we decipher the current environment, many pundit discussions are focused on one question. How should we view market and economic activity and what can we expect? It’s important to firstly point out that the latter part of that question bares no feasible or accurate answer – it’s a pure crystal ball argument whose answer can be generated by professionals and amateurs alike. It is a question that automatically looks for an emotionally-driven response and it’s something that bares more risk than any perceived benefit. The first part of the question, however, is where the objective response should stem from, in our opinion. The reality of the current economic backdrop is notably healthier than most investors care to admit, which may be a reason why equity markets have failed to produce meaningful pullbacks. Economists’ assessments of a potential recession over the next 12-months remain well below historical norms and the maintained fiscal health of U.S. consumers remains measurably well-intact. Moreover, signals from the bond market have failed to provide an actionable guide of a forward looking failed economic recovery. What our data also shows is that consumers’ previously accumulated excess savings may likely support above-trend economic growth. As a result, it is not out of the question to assume that business spending and manufacturing may benefit from demand amidst a need to rebuild inventories.

Our current stance on the economy is not one that we expect to transpire on an uninterrupted basis over the next 12-24 months. We have stated numerous times in the past that investors must realize the dichotomy of the market versus the economy in the short-term. They may present opposing directions. The continuation of such a divergence, whenever it arises, may have the ability to produce timely and unique investment opportunities amidst an economic re-opening recovery that has yet to reach its peak.

Edison Byzyka, CFA – Chief Investment Officer – Credent Wealth Management

8/20/2021 Commentary


Investment advice offered through CX Institutional, a registered investment advisor.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. The economic forecasts set forth in the presentation may not develop as predicted.

All other data, including returns, soured from Bloomberg, through the release of monthly figures from the Department of Labor, Bureau of Economic/Labor Statistics, U.S. Census Bureau, or from the Federal Reserve and any of its affiliated regional locations. 

Small Business Optimism sourced through NFIB.  Small business hiring plans sourced through NFIB. Consumer sentiment sourced through the University of Michigan. 

Earnings data sourced through Bloomberg Intelligence and through Bloomberg’ earnings analysis composites.  Interest rate cut/rise probabilities are sourced from Bloomberg’s tracking of futures contracts tied to the Federal Funds interest rate.

Economic Policy Uncertainty data sourced from Bloomberg via The Baker, Bloom, and Davis Index.

The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changed in the aggregate market value of 500 stocks representing all major industries.


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