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Monthly Market Update- October 2021

October 01, 2021

September was not a good month for investors, with a fully diversified equity portfolio down about 4%. Catalysts include the pending infrastructure packages, high oil and gas prices, and the ongoing COVID-19 pandemic. How will this impact October’s market? We explore here.

After rallying strongly in the last ten days of August, stocks ‘yinged and yanged’ in a tight range before several angst-inducing catalysts caused them to lose ground. It was exactly six months ago that I wrote in this space ‘Welcome to Year 2 of a bull market’ when the path higher becomes inevitably bumpy and the optimism about higher and higher prices occasionally gives way to fears (not necessarily the reality but the fears) of losing the profits of the immediate past.

Let’s discuss those catalysts. I will rank them in my order of perceived impact, but others might disagree.

First, those truly massive dual infrastructure packages are progressing, or not progressing, very noisily in both the House and the Senate as the GOP forces the Democrats to become totally united behind each to get passed. The Democratic party has forever been known for ‘eating its own’ as it tries, often, very unsuccessfully, to coalesce. Since my strongest bullish conviction comes from the path to a re-booting of the American economy away from being transactional to one more investment-focused, this stop-and-start-and-stop of the legislative process toward passage that would make that re-boot a reality is indeed discomfiting.

Second, oil and natural gas prices, primarily driven by the logistical bottlenecks of delivery, have soared, now well above 2018 highs at the then-peak of pre-Covid economic growth. Perhaps driven by similar factors, interest rates have also jumped. To be sure, a yield of slightly more than 1.5% on the benchmark U.S. Treasury 10-year bond is hardly ‘nose-bleed’. But its two-week 20 basis-point (0.20%) increase has raised those same inflationary concerns that led to a brief early spring 5-ish % pullback.

Third, and we’re all so tired of this, that darn Covid thing won’t go away. As the Covid-19 Pandemic continues its infectious pace, the government continues the hard work of getting more people vaccinated to get the country completely opened and the economic engines running on all cylinders again.

The Federal Reserve via Chairman Powell revealed after its September meeting its intention to ‘taper’ its level of monetary accommodation sooner rather than later. This harkens back to the spring of 2013 when a similar announcement also led to a sharp sell-off in stocks.

Two more that I’ll lump together. A high-profile Chinese real estate developer – Evergrande – may or may not miss a very large debt payment, raising the specter of a Chinese ‘Lehman moment’, the likely final straw that sent the U.S. economy into the Great Financial Crisis (GFC) in September 2008. There is also the question of the re-appointment of said Fed Chair Powell whose term will expire this coming February.

That’s a lot of ‘stuff’ being thrown at Wall Street as it returns from the hottest and, depending on where you live, the wettest/driest summer on recent record.

That all said, this ‘Year 2’ movie has played before. Of course, the cast and the scenery backdrops differ. But unless any of those catalysts become truly back-breakers, which I don’t believe, this so-far-only-5%-at-worst pullback should in my opinion not become a precursor to anything major that might lie ahead.

Democrats on their way to agreement?

Indeed, I do believe that the Democrats are, kicking and screaming, on their way to agreement. The bi-partisan ‘hard’ infrastructure bill will be joined by a truly significant, even if scaled-down, ‘soft’ infrastructure bill. Given enough time, I believe the American economy will ‘re-boot’ and its structural growth rate will return to the 3-ish% percent level that was endemic for so long. When combined with powerfully positive and inexorable demographic forces, this is my deep and strong bullish conviction for the entire decade, well worth enduring an occasional 5-10% setback as we may have right now.

I will leave you all on this note. I have decided to finally lower the curtain on a 40-year Wall Street career. It’s been a great ride. I am most proud of the personal and professional relationships I have made, and I like to think that I have had a very positive impact, most importantly for those clients with whom I have had the privilege to interact. I know I will miss it all terribly, but it is time! Thank you all for years and years and years of support. I have full confidence in the team at KLR Wealth and I know that I am leaving you in good hands. KLR Wealth had a great business before I arrived, and it will continue to provide superior wealth management to its clients as I ride off into the sunset.

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