Wesley Chapel, FL
Investors,
We are finally no longer homeless! We closed on our new home September 24th, and have finally started settling in.
Unfortunately, due to the “supply chain” issues perpetuating throughout the global economy, we will have to wait for niceties like couches, and other furniture. But we at least have a roof over our heads and a few Purple® (PRPL) mattresses on which to sleep!
Due to some technical challenges, this is the second time for me writing the monthly market commentary, so it is probably going to be short, sweet and to the point. I had already mostly completed it the first time when I picked it up on my laptop from my desktop to finish. Then, yesterday morning when I looked for it to have a proofread done by the team, it was GONE!
Don’t worry, I remember the important stuff.
I am still amazed by the juxtaposition in the national media between the excitement and positive attitude toward COVID vaccines, and the obvious fear of COVID.
Pretty much everyone who wants to get vaccinated has been able to do so for free, for months. That leads me to believe that everyone who wants to be vaccinated, has been. And everyone who has not been vaccinated has almost no intention of doing so. I don’t just base that on my own personal opinion.
The Kaiser Family Foundation is monitoring the situation with a monthly poll, the results of which are fascinating. Not surprisingly, from one month to the next, the “definitely not” [getting vaccinated] crowd is remarkably resilient.
If those who are vaccinated are presumably protected, and those who are not vaccinated weren’t afraid to begin with, where does all the fear in the media come from?
The “definitely not” crowd has varying good reasons for not wanting to get vaccinated. Although some reasons which are solely political in nature, seem silly to me. But since the media has done plenty to lose all our trust over the years, we should probably take their headlines with a grain of salt. They just need to sell newspapers, I suppose.
As I mentioned above, global supply chains have been thrown into disarray and it is very difficult to acquire items quickly.
Despite more cash sitting in American bank accounts than any other time in history, many can’t purchase the items they want, and those account balances continue to grow.
This being the case, what is known as the “velocity of money” has fallen to dangerous (all time) lows. Check out the image below from the St. Louis Federal Reserve Bank’s website for an idea of just how bad it is.
Money Velocity can be thought of as the rate of turnover in the money supply--that is, the number of times one dollar is used to purchase final goods and services included in GDP.
The media is seemingly doing everything they can to scare folks into spending money sooner. Christmas shopping has already started this year and we aren’t even that close to Halloween yet, let alone Thanksgiving and the normal Black Friday kickoff of the shopping season.
The scare tactics from the media may actually be warranted, given what we know about shipping delays on many items. For example, our couch won’t be here until December… we ordered it in September.
Here is the message you will find at Restoration Hardware’s (RH) website:
Thankfully, our beds arrived quickly but the Purple company warned us that they were running out of stock, shipping delays were possible, and the situation was likely to worsen in the near term.
What is hard for me to wrap my head around is why these delays and supply chain issues persist and are blamed on COVID, when everyone who wants to get vaccinated mostly has been. And the rest of us, many of whom have already fought COVID off with natural immunity, are willing to take our chances. It seems like companies should have been able to ramp hiring back up, by now.
Perhaps the persistence of these issues it is due to unprecedented government intervention…
At any rate, look out if velocity increases meaningfully because with it would come massive inflationary pressures. For now, the only reason that the newly minted trillions (with a T) haven’t caused even greater inflation than we are already experiencing (which is grossly understated by the government and media) is that velocity has fallen enough to dampen the effects.
As we approach earnings season which kicks off tomorrow with the big banks including Income Strategy holding JP Morgan (JPM), I am concerned about the amount of commentary we will get from CEO’s regarding their supply chains. For example, the term “supply chain” appeared 15 times in Nike’s (NKE) most recent earnings call which took place on September 23rd, and none of those mentions were positive.
You might think that a company being “sold out” of products is a good problem for a business to have. Unfortunately, it isn’t. Nike dropped by about 10% on the news. And they are certainly not the only company facing these global issues.
Just a quick google search of “supply chain” yields countless results:
Enough of that. On to other things!
Performance
September was the first down month in a long time for the stock market. Not since January when the index finished -1.11% (basically flat) has the market had negative return for a full month. This lack of any material downside is totally abnormal based on pretty much any historical standard, and again probably a function of government intervention, not a healthy economy.
In a healthy economy, the market would have had several “pull backs” of 5% or more, and probably a healthy correction of -10% or more at least once in the past year.
According to JP Morgan, “Despite average intra-year drops of 14.3%, annual returns were positive in 31 of [the past] 41 years.”
The S&P 500 index (SPX) was down 4.76% for the month of September, and the Nasdaq 100 Index was a little worse, down 5.73%.
As we have grown accustomed to during “down months,” both our strategies outperformed the S&P 500 index, even though we too finished the month down slightly.
Being down a little for one month is nothing to get excited about and none of our clients should be terribly surprised. I even mentioned last month that “September is historically the worst month of the year for the stock market,” and included the following image:
I think we have all gotten a little used to seeing our account balance go up every month over the past year, and so, the down month might have caught your attention (especially if you missed last month’s commentary.) But the stock market doesn’t go up every month, and each year we typically get a “correction” or two.
So far this year, we haven’t seen a full correction (-10% from the high) or anything even close to it, but if history is any indicator, we might be in the middle of one right now. You see, if the market doesn’t go up and make a new all time high from here before dropping another 5% or so (which I think is easily possible in October) for a drop of 10% from its all-time high, then it will turn out that we are actually still in the first correction of the year, as I write.
A 10% correction would be totally normal and still nothing to get excited about. It is just part of normal stock market behavior. We never expect for the market to go up every month of the year, but we also don’t so much care about the somewhat arbitrary dates on the calendar which represent the end of one month and the beginning of another. I realize we use the calendar to compartmentalize time, but the fact that September is historically the worst calendar month of the year for stocks doesn’t necessarily mean that you should sell all your stocks at the end of every August, either.
We are invested for the long run, and in the long run, we do expect the market to go up.
During the month of September, we didn’t even stop out of any of our positions, which to me is another indicator that there is nothing to get excited about.
Outlook
We are now headed into what have historically been some of the best calendar months to be invested in the stock market. But we do have to get through the spooky month of October which contained the single worst day in stock market history – Black Monday. October 19, 1987, where the Dow Jones Industrial Average dropped almost 22% in a single day! There is even a term for it: The October Effect, but the statistics don’t really support the idea that we should be afraid of October, any more than we should be afraid of poor returns any other time of the year.
What is most important to me is that the uptrend for stock remains intact. And yes, stocks are also still very expensive compared to their reported earnings. But as we have reviewed for the past few months (and will probably continue to review each month in this section of my commentary) the combination of stocks being expensive and in an uptrend is the second-best possible environment for us as long-term investors. The only better scenario is when stocks are cheap and in an uptrend.
Really, the only thing we want to steer clear of is a downtrend where stocks are still expensive, which is where we are headed next. For now, we are all clear.
So, while I do have serious concerns about the markets, and the global economy in general, that has been true for quite some time now, and if I had tried to “get cute” and sell our stocks because of my concerns, we would have left a ton of money on the table as the market continued to rally in the face of those concerns.
Rather than try to predict what the market will do, I intend to react quickly to what it does do. When we begin to stop out of our positions, that is when we know something has started to change. And the best part is that when we stop out, we are already sitting on cash as the market beings its downtrend, which we then use to take advantage of the next buying opportunities which are sure to arise out of whatever it is that might be changing. We don’t need any crystal ball to help us see the future.
As always, I thank God for each of you, and I thank you for reading this commentary!
Shane Fleury, CFA
Chief Investment Officer
Elevate Capital Advisor
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