September 2021 – Remaining Vigilant

The bull market continues, with the S&P 500 Index now up seven months in a row. Stocks have impressively gained 20% year-to-date, with the S&P 500 making 53 new all-time highs before the end of August—another new record. All of this has happened with very little volatility, as the S&P 500 hasn’t had so much as a 5% pullback since last October and at this point, we are starting to feel a little spoiled.

We came into this year expecting a stronger economy and robust stock market, but even we are surprised at just how resilient things have been. Earnings help drive long-term stock gains, and what we’ve seen from earnings so far in 2021 is a big reason stock returns have been so impressive. A record-breaking second quarter earnings season saw more than 86% of S&P 500 companies beat their consensus earnings estimates, the highest ever recorded and well above the 75% five-year average. S&P 500 earnings are now 26% above pre-COVID-19 levels based on the 2021 consensus estimate, helping to justify stocks at their current levels.

Another reason stocks have been so strong is Federal Reserve (Fed) monetary policies. The Fed is expected to begin to taper its monthly bond purchases (currently $120 billion), but it appears to be committed to leaving rates low for the foreseeable future. The Fed likely won’t consider increasing rates until the employment picture improves significantly, and it will be leery of quickly removing stimulus after the deepest recession of our lifetimes, especially if COVID-19 is still influencing behavior. We believe this historic Fed accommodation will continue to be a tailwind for equities -especially considering this morning’s nonfarm payroll report for August coming in well short of Economists expectations.

Even as stocks hit new highs, there is no shortage of concerns. Continued supply chain disruptions are contributing to higher input prices in select industries with little clarity on when this will subside. The highly contagious Delta variant has nearly 100,000 Americans nationwide hospitalized, and its affect is now slowing economic growth. China’s recent regulatory crackdown could lead to further bouts of volatility within emerging markets and within pockets of our domestic markets leading to sector underperformance.

Perhaps, the biggest near-term risk we see is a Federal Reserve monetary policy communication misstep. A communication blunder centered around the reduction and timing of their emergency market accommodation could spark another 2013 “Taper Tantrum” which caused treasury yields to spike up by 132 basis points over a relatively short 8-month period. Given these market risks, domestic consumer confidence has taken a hit recently, which could lead to a weaker-than-expected third quarter for the U.S. economy. However, if Delta concerns ease, any consumption that is lost in the third quarter will likely be made up in the fourth quarter.

Additionally, late summer through early fall has been a seasonally volatile period for stocks historically. Although stocks shook off the traditionally weak August, September is upon us—and as I’ve mention before, this month is historically the worst of the year for stock returns. Not to mention October is historically the most volatile month of the year for stocks. Tactically, despite these risks, we feel it’s appropriate to remain fully invested within portfolio allocations except for modest cash raises or on a client case-by-case basis.

Looking ahead to the final four months of the year, we remain positive with a slight overweight on stocks and neutral to negative on long duration bonds given the strong U.S. economic backdrop. However, stocks haven’t pulled back 5% for nearly a year, and we believe you should be on alert for seasonal volatility, aiming to use it as an opportunity to add selectively to portfolio positions.

In closing, given the gains our portfolios have experienced, if you foresee yourself needing a substantial withdrawal over the next 2-4 months, we encourage you to reach out to us. Taking a little bit off the table now for a future expense remains prudent.

We wish you and your family a great Friday evening, and a wonderful holiday weekend!

As always, please reach out to us with any questions or comments you may have regarding your specific situation.


Jaran C. Day, Chief Investment Officer

Griffin Dalrymple, CFP®, Chief Strategy Officer