On August 6, 2021, in The New York Times, we read the following:
Jobs Surge in July Offers Fresh Sign of Economic Recovery
“The American economy roared into midsummer with a strong gain in hiring, overcoming trouble in matching workers with openings…. The gain of 943,000 was the best showing in nearly a year, and unemployment was 5.4 percent, the lowest since the pandemic began. The Fed has held interest rates near zero since March 2020 and is buying up bonds each month, policies meant to keep near-term and longer-term interest rates low and fuel borrowing and spending. The job gains will give the central bank more confidence that the economy is doing well, keeping it on track to announce a plan to slow bond-buying in the coming months.”
One month later, in The Lord Abbett Economic Perspectives:
Delta Variant Weighs on the U.S. Jobs Recovery
"Lower than expected job growth in August may reinforce caution at the U.S. Federal Reserve on tapering asset purchases….Payroll employment gains in the United States slowed sharply in August, and fell way short of expectations…We think Fed policymakers will continue to move very cautiously in removing monetary accommodation. Odds are that tapering of asset purchases will begin, at the earliest, in December and, more likely, not until early 2022, depending on whether infection risk recedes quickly or lingers into coming months."
Last year, we had the same back and forth. For many months, we worked to calm fears induced by the global pandemic and resultant stock plunge, then reversed course and advised not getting excited about the V-shaped recovery. Meanwhile, headlines did their job keeping investors stirred up, one way or the other. After all, the more frenzy they can create w/ headlines, the more space/air time they can sell to advertisers. We continued to temper expectations for a continued bull market recovery this year, recognizing that normal economic cycles include both declines and recoveries, whether the decline is due to a global financial crisis or a global health crisis, and whether the recovery is due to the Fed stopping an easy money policy or Congress stopping easy money measures as the economy regains its footing.
A slowdown finally arrived 3rd Quarter 2021 and headlines have not disappointed. Whether warning of surging employment, surging inflation, surging Delta variant, surging debt, or a surging specter of government shutdown, “headline risk” continues to tempt market timing.
As John discusses in Macroeconomic View, Markets and Trading, despite the most recent decline in stock indices, the 1-year and longer period returns reflect a tremendous post-pandemic shutdown recovery for those who have stayed fully invested. As we wrote in this column last Quarter, the most important question to answer is not what the market is doing this Quarter but what rate of return and risk level will allow meeting objectives, whether income from the portfolio now and the rest of your life or whether growth for a future retirement income need.
With recovery always comes some inflation. Remember that last year we were given a zero-interest rate environment by the Fed to prop up the economy, to encourage spending and borrowing. If Fed objectives-reasonable inflation and full employment-are met, then they no longer need to continue with zero percent interest rates. They don’t need to prop up the economy. A stronger economy doesn’t need propping up. So yes, the cost of living is rising, and inflation is back in the headlines but inflation isn’t all bad. It indicates earned income and consumer spending are rising, components of a strengthening economy.
In the 12 months through August, the closely Fed-watched Personal Consumption Index, which excludes volatile energy and food prices, increased 3.6%, annualized. This is up from the 3% projected in June by the Fed. Though Chairman Powell has indicated the inflation measures call for a reduction in the $120 billion per month asset purchase program, known as quantitative easing, the Fed wants to see a consistently strong labor market first. The poor August jobs reports confirmed his reluctance to raise rates. When supply chain shortages disappear, the Fed expects inflation measures to slow as supply catches up with demand.
Depending on the headline, the biggest risk to “successful portfolios” often is investor decisions to sell everything in favor of the bank or the reverse, the urge to finally buy stocks as prices are peaking, getting on the bandwagon of the latest winner, whether real estate, gold, oil, or tech. The pendulum swings back and forth, making it interesting for day traders but not for long-term investors guided by a plan.
Since we routinely report macroeconomic factors each Quarter, I found it amusing to recently read again that two world-famous investors preached ignoring macro forecasts. “We have worked together now for 54 years, and I can’t think of a time we made a decision on a stock or on a company, where we’ve talked about macro.” [Warren Buffet, 2013 Berkshire Hathaway annual meeting] Similarly, John Templeton told a Forbes reporter in 1978 that he didn’t know and it didn’t matter whether the market is going up or down. What mattered was the price of a stock relative to what he believed it was worth.
Global titans of investing ignored headlines, whether inflation prognostications, debt ceiling drama, politics or international intrigue. For decades, their success as portfolio managers was built on corporate research, buying shares of companies expected to grow over at least the NEXT decade, holding those shares through economic cycles as long as they believed in their continued growth, and buying more when the stock was on sale.
So, if they ignored those headlines, it makes sense that investors can, too. As your portfolio managers, we study those macroeconomic factors. Your energy is better spent taking advantage of tax breaks (See Eric’s column, Are You Tax-Efficient?), and helping us update your financial plan to realize your latest life goals and dreams.