Inflection Point - 3rd Quarter - 2021
As we enter the final quarter of the year, we perceive there may be meaningful change on the horizon that could alter the trajectory of returns for most asset classes. This does not necessarily portend a good or bad outcome, but rather a change in how we view important risk factors.
The current news cycle is dominated by inflation concerns, political animosity toward the US debt ceiling, as well as geopolitical and economic issues surrounding China. Although nothing is particularly novel here, we sense that what has driven returns over the last year may change going forward, resulting in increased market volatility. Since the pandemic induced sell-off in early 2020, equity indexes have not only recovered but established new highs on the back of growing confidence, spurred by unprecedented global stimulus from nations around the world. This swift and significant action has cut short a global recession and is likely to support growth into the future. We perceive investors may now be questioning the sustainability of recent economic activity.
US (Russell 3000 Index) and global stock (MSCI All Country Global Index) markets returned 114% and 100% over a 17-month period from market lows through the beginning of September. Though this rate of appreciation is not likely to remain over long periods of time, it certainly does not preclude further gains. Valuations are no longer inexpensive, and risk is more balanced today than in the recent past.
The two biggest near term issues facing markets today are the concern that short-term interest rates may start increasing in one year’s time, and the political uncertainty regarding the debt ceiling and infrastructure spending. The Federal Reserve plans to start curtailing open market purchases of bonds and mortgages later this year, paving the way for a rising Fed Funds rate toward the end of next year. Both actions point to a healthy economy, but history has shown it does tend to lead to an increase in short-term volatility. The impact of greater funding expenses, however small, will be priced into all markets.
In our opinion, the debt ceiling quagmire that reappears every few years has greater potential implications to US and global economies. Although there is a low likelihood of a US Government default, if even a short-lived incident were allowed to occur, it would have devastating consequences. Economic activity would grind to a halt and equity valuations would reflect this new reality with diminished expectations and lower multiples. These possible macro issues are primarily political in nature, are well known, and should be avoided.
On a more positive note, the rate of productivity enhancements in the areas of DNA sequencing (healthcare), robotics (industrial), and artificial intelligence (technology), to name just a few, are advancing at increasing speeds. It is the quest for knowledge and innovation that drives greater efficiency and output, freeing our time, energy, and dollars to focus elsewhere. In simple terms, we get more for less. This trend is the linchpin of sustainable wealth creation and disproportionately benefits the industry innovators and disruptors. Success tends to lead to more success.
With November just around the corner, municipal and local elections will take center stage during this off cycle. With few exceptions, we all benefit from our dedicated election officials and workers who strive to provide a safe and trusted process to measure the will of the community. Although voters don’t always make the best decisions, collectively, we reap the rewards of democracy in action. Our trust and participation in the election process is foundational to our society and, without it, capitalism cannot thrive.
Please remember to cast your ballot on or before November 2nd.
EPIQ Happenings
EPIQ is thrilled to announce the addition of our newest team member and Analyst, Noah Haverdink. Noah comes to EPIQ with myriad skills, including expertise in financial planning. His was previously a Financial Planning Consultant with Northwestern Mutual.
Please join us in welcoming, Noah!
EPIQ Partners