With the turn toward Fall frequently tripping markets, it’s hard to see recent events as much of a surprise but rather consistent with a normal, seasonal breather. As we write, there’s a reason why this time might be different, but more likely bad news simply sells. For our part in seeking to capitalize on infrequent market dips to acquire shares, we welcome the turn. Thus, while we’re as averse to weak prices as anyone, we see the present state more as an opportunity than a threat.
Our Three Take-a-ways:
- Stock prices have advanced over the past three years with client holdings marking a 95% rise since year-end 2018 against 80% for the benchmark S&P 500. Markets have been good to us!
- Collective profit-taking means capital gains will likely run ahead of last year’s by some measure. Please avoid surprises and review your attached statement with your tax advisor.
- For now, we’re sanguine the markets remain bowed, but not broken. We expect that as the early “frost” in Washington lifts, our Quality Growth Stocks will keep pace and renew their solid path.
Current Quarter-End Reflections:
- COVID’s Re-Open SURGE ran headlong into 2nd quarter constraints that accelerated in the third.
- Fears of a 1970’s style stagflation where wage growth exceeds sales and profits have weighed on stocks even as supply chains proved unable to make deliveries and employers failed to fill openings.
- Recovery and shorter-term inflation are now forcing a rethink of Fiscal and Monetary stimulus underlying policy and market prices for most of the past decade.
- As this reaction unfolded, we raised cash reserves to stand at 15% as September closed with portfolios averaging a 1.3% stock return for the Quarter slightly edging the S&P 500 Index.
- Comparing the retreat over the past four months in individual issues peak-to-trough, the S&P 500 averaged a drop of 18.4% while that for Carderock client holdings measured just 14.8%.
- We conclude:
- Growth stocks reacted more to the late September change in Fed policy while other issues weakened on earlier factors- supply chain issues, COVID, et. al.
- Our Quality Growth issues became relatively more attractive recently, while offering less volatility.
- The breadth of the market decline by issue (18.4%) looks overdone and ripe for a rebound.
- Better bond yields will attract less enthusiasm, but still offer opportunity.
Our Outlook and Game Plan for the Next Quarter:
- Though China’s growth may slow, the sluggish Sino-US decoupling may be offset by renewed US investment and boost to productivity and run less significantly than expected.
- Similarly, changes in stimulus from the Fed and US Fiscal spending could wind up much smaller and less disruptive than investors anticipate.
- We expect the Bullish consensus will survive to drive the Re-Open at a pace slowed by shortages and COVID. Nevertheless we think the negatives and resistance will lift in due course.
- With digitalization of the broader economy solidly in the driver’s seat, efforts to push away from (Quality) Growth and Tech will come up short.
For Carderock clients, the September bump means less than the noise suggests. The year has been good, and prospects remain positive. We will continue to work broader in diversification, favor stocks and keep bond durations short. As always, should you wish to review your investment progress, plans and prospects, please feel free to call at your convenience.
James W. Mersereau, CFA, CIC
Daniel A. Kane, CFA, CIC