12:00 TUESDAY – Stock Market Report #132 – 9/21/21

by Robert Holman | The Defensive Advisor | www.defensiveadvisor.com

INSIDE: Current market rating, market trends commentary, and a free offer.

TO MY EXISTING CLIENTS, THANK YOU FOR YOUR TRUST. We’ve had great success since we started this RIA in mid-2018, up more than 80% in our moderate risk portfolios for the 3-year period ended mid-2021, after all expenses are deducted.

MARKET RATING … I’m staying at 6.5 (where 0 - 4 is bearish, 5 is neutral, 6 - 10 is bullish) – although I’m much more cautious about the near-term because risks are increasing, while remaining optimistic longer-term.

I recognize that’s a somewhat confusing statement – so think of it this way --- as taking your foot off the accelerator and moving it lightly to the brake, slowing down because there is heavy traffic ahead, as a precautionary move should something awful happen. Once you clear the congestion, the foot goes back on the accelerator. China financial concerns, Covid-Delta, government spending, debt ceiling, corporate taxes, inflation, Fed tapering, etc. are the heavy traffic issues causing nervousness in the market.

When changing conditions call for controlling portfolio risk, we reduce our holdings when market risk increases - either selling down or selling out - in order to preserve our capital. Then when the risk-reward profile becomes more favorable and returns to bullish, we invest our cash opportunistically for capital gains. There are always good investment opportunities available.

MARKET TRENDS … On Monday (and somewhat on Friday) the market was selling off hard and it looked like the much-anticipated correction might at last have arrived. Market professionals know that valuations are quite high due in part to low interest rates, moderating inflation, and an expected higher than normal pace of economic growth. Everyone also knows that interest rates increases are just ahead, inflation will pick up as government spending and taxation goes into effect, and the tail-end of economic recovery from Covid-19 will only last for a brief period.

So, here is my brief assessment of current worries and related impacts:

China is tightening regulatory controls on Chinese stocks, and it has failed (so far) to come to the rescue of Evergrande, its second largest real estate company. While the Chinese government has said that Evergrande is NOT too big to fail and government intervention is not available, Thursday is their interest payment or failure deadline. Markets are ALSO nervous about regularity crackdowns --- an index of US-listed Chinese stocks is down around 50% this year. While these government actions may prove beneficial in the long run, market uncertainty brings stock price volatility until the effects of the actions are resolved.

If the Covid-Delta infection rate does not decrease soon, we will be in for another round of disease, sheltering, slowing economic activity, all leading to lower corporate profits and lower stock prices. And, while the infection rate is dissipating somewhat, if the assessment on Delta “hanging around” changes, the market response is likely to be very, very quick. Decreasing economic activity decreases corporate profits and stock prices.

The U.S. debt-ceiling must be increased, but historically that has been only a temporary concern to investors. These things usually get worked out pretty quickly. That’s likely to be the resolution this time around, but it’s possible a stalemate could set in, and investors would not like that.

When the Fed decreases the amount of money it’s injecting into the economy (tapering), that tightens financial conditions. As steady and measured tapering finishes, accommodation is thus removed. Then, as the Fed deems further tightening advisable, interest rates will increase – this will occur sometime next year. This multi-stage process forces less credit worthy borrowers out of the market (with less money to loan, banks can be “picky” regarding who they will loan to). Through discounting future stock prices, rising interest rates lead to lower stock prices.

Large increases in government spending and taxation rates will likely be inflationary. At first glance, it would seem increases in taxes would reduce corporate earnings, but we know that most corporations are nimble, and will pass along to consumers all of, or as much of a tax increase as possible. It’s simple really; it’s just what businesses do. Price inflation increases lift interest rates, and as above, lower stock prices.

We know a number of things about inflation and stock prices --- for example, Inflation increases can lead to lower stock prices, at times inflation rates exceed interest rates, and stocks can be a great hedge against inflation. So, that’s a bit contradictory, and analysis can be a little bit complicated. But, corporations will attempt to deal with cost inflation by maintaining their profits (increasing revenues proportionally to costs) and thus will pass inflation on to consumers in the form of higher prices. The Fed has stated that inflation will moderate, and there is evidence of that occurring in recent CPI reports. But inflation worries many investors, transforming their outlook from optimism toward caution, and in turn we experience price volatility and cautious buying activity for stocks.

At this time, none of these issues would appear to be a trigger point that would set off panic selling. But their cumulative effect might trigger uncomfortable market volatility, sector rotation, and some downward stock price adjustments for a while. Rising inflation, tapering, interest rate increases, possible slowing economic activity, unfavorable Chinese financial and regulatory policy, and US political wrangling has caused me to be cautious, or as in the example, to have my foot on the break in case something awful develops. All awaiting on just one significant catalyst.

So, I hope all of you also see the reasons I’m cautious in the short run, until these issues get resolved. Meanwhile, I’m remaining bullish overall for the long run because current economic reports show an economy recovering from Covid-19 with inflation diminishing. Remember this “resolution = re-engagement” or to pick up with my example, resolution moves the foot off the brake and back to the gas petal, a re-engagement with moving forward at a relaxed pace.

I hope all of you can see how the above all boils down to no change in my 6.5 rating rather than no opinion or a negative opinion, even as I make portfolio changes.

A little longer letter than I usually write, but I believe it’s necessary at this time. You need to hear from me with respect to what’s developing.

FREE OFFER for PROSPECTIVE CLIENTS – I would be pleased to give you a complimentary portfolio evaluation and risk assessment -- pointing out any flaws we find in your portfolio and giving you our ideas for improvement – all at no cost to you. Contact me at roberth@defensiveadvisor.com or by calling 972-702-6032 or by sending your contact information via the website link below.

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Opinions voiced in this post are for general information only and are not intended to provide specific advice to or recommendations for any individual, without complete knowledge of that individual’s total financial profile. No strategy assures success or protects against loss. Past performance does not guarantee future results