October 13, 2021 Letter to Clients
When I last wrote to you in July, the country was in the middle of the mass vaccination campaign and many Americans were feeling more confident to get out and return to the activities they once enjoyed. And while the concerns of Covid are still here, we’ve seen promising progress being made with schools reopening and many returning to in-person work. As we enter the last quarter of the year, I’d like to provide some meaningful insight into the ongoings of the government, economy and financial markets.
Spooky September
We often write about seasonality and the markets as we work our way through parts of the year that have historically proven challenging for stocks – think “Sell in May and go away” and the “Summer Doldrums” – and September did nothing but live up to its reputation this year. Over the past 70 years, September has historically been the only month where the S&P 500 has averaged a negative return. This September proved no different given the laundry list of headwinds for the markets last month including uncertainty around fiscal policy, the persistence of higher inflation, and supply chain and labor challenges. Let’s take a closer look at how these events impacted the markets last month and their potential impact going forward.
Debt Dilemma and Government Shutdowns
All eyes will be on Congress as they face two massive tasks come December: funding the U.S. government and raising the debt ceiling. These two concepts are often confused but differ in the roles they play.
Government Funding: Funding the U.S. government is a frequent hurdle for lawmakers as Congress must approve a federal budget ahead of October each year to finance spending on future bills for the upcoming 12 months. When lawmakers are unable to approve a federal budget, government shutdowns can occur which has been a regular occurrence over the past decade. Congress narrowly escaped the end of September deadline to prevent a government shutdown but gave themselves little time to finalize a funding plan. If lawmakers don’t have a budget in place by December 3rd, the government will be required to reduce agency activities and stop nonessential operations.
The Debt Ceiling: The debt ceiling, also referred to as the debt limit, can be equated to the country’s credit card balance or the amount of money the federal government owes for spending on payments such as paychecks to federal workers and contractors, Medicare benefits, military salaries, tax refunds, and Social Security checks. Congress is tasked with limiting how much money the government can borrow, and once the limit is reached, lawmakers must raise or suspend the ceiling before the Treasury Department can issue more debt and continue to pay the government’s bills. The debt ceiling does not authorize new government spending but allows the Treasury Department to pay for existing obligations and spending Congress has already authorized, such as trillions in Covid relief or a deficit caused by tax cuts.
Legislators effectively kicked both the debt ceiling and government funding cans further down the road to December when they approved short-term legislation to fund the government through December 3rd and raise the national debt from about $28.4 trillion to $28.8 trillion.
Many analysts warn we could see a repeat of September and October’s short-term volatility in the financial markets as the new December 3rd deadline nears for Congress to make a more long-term decision on the debt ceiling and future government spending. I still believe, however, a compromise will ultimately be reached between the two parties, and the financial markets will be more focused on the economic expansion rather than the temporary disruption caused by Congress’ indecisiveness.
A Perfect Storm - Supply Chain Issues Continue
“Supply chain” is becoming the latest catchphrase for the markets. As we’ve previously discussed, the ripple effects of Covid are still being felt throughout the economy with goods and services being scarce and proving difficult to deliver to consumers. Supply chains are only as strong as the weakest link and small disruptions very quickly can result in big economic losses. With the global economy being heavily reliant on goods manufactured and shipped from abroad and still being susceptible to Covid outbreaks, the strains put on the critical supply chain are being felt everywhere.
By now, you may have seen news of port congestion and shipping container shortages off the California coast. At the time of this letter, there are more than a half a million shipping containers on cargo ships anchored or in drift areas off the coast of Los Angeles and Long Beach waiting for openings along the ports to dock and unload. For context, before the pandemic the ports would normally have zero to one ship at anchor waiting to dock. Today, the ports are operating at 60 to 70 percent capacity which is a significant operational disadvantage as it makes it difficult to keep pace with the ports in Asia and Europe that are sending goods on a 24/7 schedule. Although the ports are increasing their hours to help unload the ships, it’s not enough. Without addressing the shortage of truck drivers and capacity limitations at warehouses, supply chain bottlenecks will continue to squeeze businesses big and small; and we’re likely to see shortages continue to worsen as we head into the key holiday season.
Speaking of the Holidays…
Many of us find comfort in decorating our homes for the holidays, and it’s no surprise that consumers are gobbling up retailers’ holiday décor inventory faster than usual this year. Home Depot, for example, recently reported that it sold out of an early release of Halloween decorations, a good indicator that consumers have a large appetite to spend this holiday season.
Retailers are looking forward to an early and lucrative holiday shopping season this year with consumers wanting to get back to more traditional holiday celebrations. But there will be more pressure than ever on retailers to meet consumers’ rising expectations and persistent demand for goods, especially with inflationary pressures, labor shortages and the ongoing supply chain issues. Major retailers like Amazon and Target have already announced their “Black Friday-worthy” deals to entice customers to begin their shopping earlier than usual, and many companies have announced they will be adding a significant number of jobs during the peak season to address the increase in brick-and-mortar shopping and fulfillment needs that ecommerce demands. Still, shoppers are likely to face shipping delays and find the season’s hottest ticket items, such as toys, popular apparel brands, small appliances, and the elusive Sony PlayStation 5, out of stock more than usual.
An alternative to being reliant on goods sourced overseas that many big-box stores sell, is to support small businesses and shop local. As consumers we have the power of deciding how and where to spend our dollars and if you’re looking for unique gifts, you can find a variety of items at local shops you may not find elsewhere. When you shop locally you are investing in your community. According to the Small Business Association for every $100 spent at a small business, $48 is recirculated into the local economy as compared to $14 when spending the same amount at a big-box store or national retailer. For those of you who prefer to shop from the comfort of your homes, you may be pleasantly surprised to find what small businesses have to offer online.
Keeping Perspective and Moving Forward
Although we’ve seen a gradual return to normalcy with more Americans getting vaccinated, booster shots becoming available, children back to in-person learning and travel restrictions being lifted this Fall, the pandemic continues to weigh on everyday life. With the uncertainties that exist outside of the virus itself that we’ve discussed in this letter, I recognize in my role as your financial advisor the importance of providing sound and conscientious guidance, especially in times of uncertainty.
I expect concerns over rising inflation with supply shortages and ongoing political discord from Washington will continue to subject the markets to periodic swings and potential pullbacks throughout the last quarter of the year; however, I am keeping a close watch on the ever-changing investment and economic landscapes to understand how those changes may or may not impact our clients’ portfolios.
Many of us thought we would be on the other side of the pandemic by now and although it is still ever present in our daily lives, we’ve certainly made much progress since this time last year. One thing that remains constant is my gratitude for our clients and the continued confidence you place in our firm.
Until we speak again, I wish you and your family good health and an enjoyable holiday season.
Best wishes,
Steven LePage