Kovitz Newsletter 3Q21


Why'd you have to go and make things so complicated?

"Complicated", Avril Lavigne

There has been much handwringing among market commentators as of late. After eight months of a steady, more or less uninterrupted rise, the stock market1 sold off 5% in September. There have been heated debates over whether recent inflation is transitory or a sign that monetary and fiscal policy have been too accommodating. The Federal Reserve has begun softening its accommodative stance, making comments on the possibility of “tapering” its purchases of long-term bonds. Global supply chains have been snarled by an imbalance of shipping containers on Pacific shipping routes, backlogs at ports, and not enough truck drivers and chassis to get containers out of ports and railyards. Add in a global shortage of semiconductors affecting everything from phones to automobiles, China cracking down on various industries within their borders, and the often overlooked fact that another 50,000 Americans died from COVID in September, and you have quite the wall of worry impacting global financial markets.

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The speed and magnitude of the equity market’s recovery from the pandemic-induced lows of March 2020 has been nothing short of remarkable. Since that time, the S&P 500 has almost doubled– the fastest such gain since World War II. So far in 2021, the S&P 500 has closed at a record-high 53 times- the most by this point in the year since 1964.

Despite these impressive statistics (or, maybe because of them), much of the conventional thinking about the equity markets remains solidly bullish. Among the optimistic beliefs underlying this thinking are: 1) A thriving U.S. economy, which is turbocharging corporate profits, will continue for the foreseeable future. For instance, during the second-quarter earnings season, nearly 90% of companies exceeded analyst forecasts – the highest such level of “beats” since 1994. 2) The U.S. Federal Reserve will keep interest rates at rock-bottom levels, possibly for years to come. 3) The U.S. Government will continue spending heavily to keep the recovery going. 4) Investors continue to exhibit the “buy the dip” mentality and to adhere to the mantra, “there is no alternative” (TINA) to equities because bond yields are so low.

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Interest rates oscillated this quarter as the bond market digested a surge in delta variant COVID cases, persistent inflationary pressures, and less accommodative rhetoric from the Federal Reserve (“Fed”). The yield on ten-year Treasuries closed the quarter where it started at 1.5% after touching lows of 1.2% in July and August. Despite the volatility, interest rates remain markedly higher on the year as the fear of further virus-related lockdowns wanes.

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