Kris Venezia, Market Analyst

I was asked a few times during year end meetings if I was worried about being in a bubble. While I don't think the overall market is in a bubble, there are constantly bubbles forming and popping in areas of the global market.

I would make a case that there were some bubbles with the stay-at-home and high flying stocks that did well during 2020.

Peloton went up 434% in 2020. There was a narrative that working out was changing in a revolutionary way. We were all going to workout in our living rooms forever.

It turns out that wasn't true. Zoom, Teladoc, Docusign, Chewy, Chegg and so many others in this table were part of that stay-at-home fad. They have come back down to earth.

Sports gambling stocks went through a bubble phase of their own. DraftKings and Penn National Gaming (which has a stake in Barstool Sportsbook) popped and then dropped.

Marijuana stocks went through a bubble. It's not seen in the chart because it was a shorter cycle, but we saw many pot stocks and ETF's skyrocket after Democrats won the Georgia run-off elections. The high was short lived. There are marijuana stocks and funds down over 50% from the peak in February.

Bubbles are a natural part of investing. They happen because humans invest and humans get emotional. Bubbles become an issue when they become a problem for the broader markets. The most popular example of this was the dot-com bubble from the early 2000's. The dot-com stocks became part of the broader market indexes and when they crashed, it caused a lot of pain.

The stay-at-home, marijuana and sports betting stocks have fallen, but the losses have been confined to those specific areas of the market.

Clint Carpenter, Director of Operations

In a rare feat, the S&P 500 has outperformed the NASDAQ this year, with a 27% YTD return, compared to the NASDAQ’s 22%. The DOW isn’t far off either, returning 19% YTD. With two more trading days left in this slightly volatile fourth quarter of the year, we’ll see how those returns hold up.

Moving on, treasury yields have bounced all over the graph this year. The 10-year, which started the year paying you .9% is now yielding slightly over 1.5%. The 30-year has been on a slightly different journey, starting the year paying 1.6%, bouncing a few times to nearly 2.5%, and settling today at a yield of around 1.9%. As you can imagine, mortgage rates have moved all over the map as well, but ultimately cost you more at about 3%. I’ll touch a bit more later on how the Federal Reserve influences these numbers.

Many of our clients have heard this from us already, but basically, here’s what the Fed has been up to.

When there is trouble in the economy, one of the most powerful tools, and arguably one of the only tools the Fed has to bolster it is to set interest rate policy. The Fed tinkers with some internal interest rates that banks use to borrow and lend money to each other, which then has an overall effect of changing all interest rates.

Essentially, the Fed is making it cheaper to borrow money. That’s nice for people like you and me because it makes it cheaper for us to go out and get a mortgage or a car loan or some other form of financing. Where it’s also very useful is in corporate borrowing. You can imagine how a company that borrows a lot of money to grow their operation is suddenly more profitable when they can borrow that money and pay less interest.

This is all great for the borrower, not so great for the lender, which is what you are when you buy bonds. You are loaning your money and receiving interest. When the Fed sets rates lower, you’re not receiving as much interest as you used to, making the bond market less attractive. This can have the effect of bolstering the stock market, because there’s really just nowhere else to put your money if you want it to grow. If the market starts to go up artificially in that regard, we can get into trouble, so the Fed has a great responsibility to not keep rates too low for too long, but also not raise them if the economy isn’t doing great.

So, after bringing rates down significantly at the beginning of the pandemic, what the Fed has been waiting on to start raising rates is for the labor market to get stronger. It has been trending better all year, and in the last few months we’ve seen very low unemployment, stronger job creation and rising wages. As such, the Fed has begun to indicate that they will begin to raise interest rates over the next few years. They can certainly change their minds if the economy gets into trouble again, but for now, we’re told to expect at least 3 rate hikes in 2022. This is something we obviously pay a lot of attention to, so we’ll be making changes as this unfolds and we’ll certainly be keeping you informed.

Kris Venezia, Market Analyst

We are in what’s called earnings season, where public companies report on how they are doing and executives give commentary on their businesses.

The main talking points have been inflation (price increases) and labor shortages (companies having a hard time hiring). Outside of that, there has been interesting commentary on how behavior is changing as society adapts to Covid.

I remember being stuck doing workouts in my living room during some of those Covid lockdowns. There was a time when it felt like gyms were finished. Well… those days are starting to fade.

Planet Fitness had a really upbeat report on their business. Executives said they’re “at 90% of workouts compared to 2019.” They noted sign ups are growing and that members are coming in more frequently each week.

Contrast Planet Fitness with Peloton, which had an awful earnings report. They had to lower guidance as demand fades for their bikes. Peloton then called an “all hands on-deck” meeting Friday to address ways to cut costs which includes a hiring freeze and less spending on advertising.

You also have Lyft reporting earnings and executives there saying prices should drop. Why would Lyft (and Uber) prices drop? Executives said they have been able to bring on more drivers and that they anticipate it will continue heading into 2022.

Lyft’s CFO said three factors are helping with adding drivers – the ending of those federal boosted unemployment benefits, drivers becoming more efficient and driving for longer hours, and more drivers are signing up as they see more people get vaccinated. With more drivers competing for riders, it helps lower ride prices on these apps.

Other quick hits that hint at society moving to more pre-Covid behavior include MGM being extremely positive on the number of people going to Vegas for fun, air travel continues to inch closer to pre-Covid numbers with airlines anticipating a lot of travelers for the holidays, and recreational marijuana sales weakening as people find other activities to pass the time.

The missing piece for airlines, restaurants, hotels and those types of industries comes from the lack of business expenses. There are still a lot of companies hesitant to fly their employees out. There are also still a good amount of people working from home. Restaurants benefit when people go into the office and run out to grab food for lunch or get dinner with co-workers/friends near the office.

I will throw in my opinion here, and I believe business spending returns in 2022. If a business owner sees a competitor bringing employees back into the office, they will probably look to do the same. If a business owners sees their competitors flying out employees to meet face-to-face with clients, they will most likely want to match that. Companies also plan their spending out in advance, so as they make their 2022 spending plans, more of that budget will go towards travel than it did in 2021.

Daryl Eckman, President

I want to talk about something that I’ve talked about many times, and it’s always worth talking about. It is keeping our expectations in line.

History does not repeat itself, but it does rhyme. Quite honestly, this is one of our harder tasks, which is keeping clients’ expectations and emotions in check when the market is performing really well.

We would not hate a market pullback. We could use a pullback to put some money to work at better prices.

Our job is to keep emotions in line. We know in the past, when people get overextended, it comes back to bite them when the next bear market comes.

We are investors, we are in it for the long haul, and we are managing portfolios with that in mind.

I also wanted to talk about the Portal. It makes our job easier and is a valuable tool for you to use to keep track of your finances. The Portal allows us to work together and keep tab of your financial plan.

Our team has a number of areas we service. We work on tax preparation. I have also made some inroads and established relationships with attorneys and realtors so we can handle what you need.

We also work with insurance. If you have any long term care needs or other insurance needs, we can get all of that taken care of for you.

One priority that has come up is making sure that heirs are taken care of in the worst case scenario. We can help your family find an inexpensive, short term life insurance policy. If the loss of income from a breadwinner would have a catastrophic impact on the family finances, a term policy can cover expenses in that worst case scenario.

When it comes to anything financial, our team is there to help you.

Clint Carpenter, Director of Operations

I’ll touch a bit on some more positive news… one of the things the Fed has said they are waiting on before really feeling convicted that the economy is doing well is a better job market. Over the past year we’ve had some really disappointing and lagging jobs numbers, with some missing the mark by over half. Well, just this past week we got some better news.

The unemployment rate has fallen to 4.6%, which is a new pandemic low and better than expectations. 4.6% is about where we were in 2016. This drop comes with the labor force participation rate holding steady at 61%, so it indicates a nice reliable number.

One report we watch closely is US non-farm payroll numbers - and it was just reported that payrolls increased by 531,000, well above the expectation of 450,000.

More positives… wages grew another half percent, so we’re up close to 5% since this time last year.

Further, a lot of the job growth came in some key industries - led by leisure and hospitality, which backs up what Kris was talking about earlier, and then that was followed by professional and business services and manufacturing jobs.

So why do these pieces of information matter? They tell us that even in the face of inflation, severe labor shortage and supply chain issues job creation is on the rise. If this is the sort of job growth we see over the next several months, we’re on a great path. Data like this plays directly into the Fed’s decision to ease asset purchases and raise interest rates which many argue needs to come soon.

Clint Carpenter, Director of Operations

On October 18th, the federal government reaches it’s borrowing limit, or debt ceiling as it is called. Basically, if that ceiling isn’t raised, the government cannot pay its bills. This has never happened - the U.S. has never defaulted on its obligations because congress can usually come to an agreement on how to raise it.

Economists say a default would cause a lot of problems, things like a jump in interest rates, severely diminished reputation of the full faith and credit of the U.S. government now and in the future, as well as delayed checks for social security recipients and U.S. armed services members. Running out of money could damage treasury bills, considered the safest asset on the planet, and could weaken demand for the U.S. dollar, potentially giving other currencies a run at the globe’s preferred currency.

Congress knows it needs to raise the limit, but partisanship has never been stronger - Republicans are vehemently opposed to many of the spending bills Democrats have proposed and plan to pass without bipartisan support.

The debt ceiling is often used as a tool to reach agreement, but this deadline is rapidly approaching at a time when these bills are reaching final stages. On Wednesday, Senate Minority Leader McConnell indicated that he may offer a short-term ceiling extension which could ease this pressure. The markets have already responded positively to that.

We’ll be watching this closely, along with the rest of the world, especially as we get further into October, which is traditionally the most volatile month of the year.

Kris Venezia, Market Analyst

September is historically not the friendliest month for the markets. You couple that with some hiccups in the global economy and you get some losses like we had in September.

The frustrating part for us is there are still several items we have to monitor that we will probably not have answers for in the near term.

As Clint touched on, the debt ceiling has become an issue to watch.

We will have more information on Friday when the next jobs report comes out, but unemployment is higher than expected at this point in the economic recovery. There are several factors analysts believe is contributing to this. The frustrating part here is that there are a lot of jobs open and there are people unemployed, but for some reason, the job growth is coming at a slow pace.

We have discussed this in previous commentaries, but supply chain issues are continuing to be a pain for many companies. Covid outbreaks and restrictions in parts of the world, like Vietnam, are causing problems. Transportation with ships across the Pacific, unloading those ships and then getting trucks to transport items in the U.S. are all slowed down.

The boosted unemployment benefits have stopped. The form of stimulus ending could have a slightly negative impact on consumer spending.

Consumer sentiment with the economy is still low compared to pre-Covid times. Surveys seem to indicate that part of the issue comes from consumers who are concerned about Covid. Other concerns that come out of surveys include politics. Republicans are less happy with the economy in 2021 than they were during the Trump administration. There are consumers who also say they are worried about inflation.

Finally, inflation is putting a drag on investors appetite for risk. There are numerous factors contributing to inflation. They include higher commodity prices and higher wages, among other things. Commentary from business executives has led us to believe inflation will stay hot into 2022. The hope earlier this year was that inflation would cool off late in 2021 into 2022.