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October 4, 2021 – A tough September is not a harbinger of what’s to come. The Delta variant is fading, and interest rates are not likely to rise as fast as they did in September. Inflation concerns remain. However, that should mute future upside. Higher earnings, on the other hand, will mute the downside.

//  by Tower Bridge Advisors

Stocks rallied at the end of a dismal September. While growth in September deteriorated a bit thanks to the persistence of the Delta variant of Covid-19, stocks fell due to a combination of issues, a slowdown in growth being just one. Interest rates rose, the Fed hinted at tapering bond purchases before year end, and the political environment was one in turmoil. It remains in turmoil.

But….

“Don’t worry, be happy” – Bobby McFerrin
“What, me worry?” – Alfred E. Neuman

Despite problems with transitions, despite higher interest rates for a few weeks, and despite political turmoil, the economy is strong and likely to strengthen further. The Delta variant is history. How do I know? The lead story on the evening news is no longer overcrowded emergency rooms! Seriously, the impact of the variant is not only decreasing, it is decreasing rapidly, in line with the exact pattern from other spikes. More people are getting vaccinated, booters are arriving, and the herd impact of herd immunity is increasing. Now Merck is on the verge of bringing a drug to market that can lessen the severity of the disease materially. I hope everyone understands this. Fast forward to next spring or summer when the Merck pill (a pill, not a shot) is readily available. If you feel sick, you see the doc, get the pill and the worst that happens is a few lousy days a la the flu. That changes the whole dynamic of the disease. The pandemic ends: the endemic begins. That means Covid-19 doesn’t disappear. AIDS never disappeared. Covid 19 becomes a disease that we can deal with without changing our lifestyles.

Economically, in one word, that means normality. It means parents don’t have to worry that their kids will require virtual learning and they will have to stay home. It means I can go to theatre and know I am not going to face death in a week. It means all the shut downs that are causing supply chain gridlock start to fade. It means supply chain issues are weeks or months from ending. But they will end.

“What, me worry”?

OK, there are still concerns. The Democrats can’t get enough votes to pass close to $5 billion in added spending. They can yell it doesn’t cost anyone anything, but that’s a pile of political garbage. Even if they mean the rich and corporations are going to pay for their entire wish list, that doesn’t fly. How does $2 trillion in taxes and $5 trillion in spending come to mean no cost? So far at least, a few Democrats understand the difference. While the progressives can crow that they delayed a vote on the infrastructure bill (which wasn’t fully paid for), they are no steps closer than they were a few weeks ago to passing anything.

The reality is that the $3.5 trillion (supposed!) reconciliation bill must be cut. It must be cut a lot if it has any chance of passage. The progressives can label Senators Manchin and Sinema whatever they choose, but they aren’t going to get anything near $3.5 trillion across the finish line. Playing political games like shortening the length of programs, won’t fool anyone currently opposed to the bill. The reality is that while parts of the program are popular, the program in its entirety is not. The American public realizes that supersizing the government is going to be a huge long-term cost borne by all at some time, in some context.

Will the Democrats work to tighten the bills? If they want them to pass, they will. The infrastructure bill was cut in half before it gained bipartisan support in the Senate. Can they get Republican support for parts of the reconciliation bill? Unlikely, if Republicans are never asked to participate in its creation. The Democrats took the solo path from the beginning. Are they being held hostage by Sinema, Manchin, and others? I don’t think so. The better response is that Democrats need to find a common center, one that all 50 Senators and all 435 members of the House can agree on. So far, the moderates haven’t given in, and the progressives still want everything. If they can’t find middle ground, nothing will happen. Wall Street would love that!

Back to the economy. It is solid and growing at above average rates. Yes, maybe Covid and supply chain issues have slowed it a bit, but as the Delta variant passes and supply chain issues get resolved, growth will get back on track at levels not seen since before the Great Recession.

Which leaves just one last issue, inflation. The Fed is right that many of the forces pushing inflation higher today will ebb as supply and demand rebalance. What about shelter and labor costs? There is a shortage of available housing that isn’t going away any time soon. That means higher home prices and higher rents. There are workers that will reenter the work force once Covid disappears but there are also a lot of retirees that will stay retired. Higher home values and stock prices ensure that. It is hard to believe that wage inflation is going to disappear.

Thus, we are headed for a reacceleration of growth, maybe a slight moderation of inflation, but the likelihood is that key inflation components (rent and wages) will stay above average for a longer period. That suggests a good market for equities but not a great one. We just finished a third quarter with a great July, a flat August, and a funky September. Transitions create volatility without a lot of direction. In Q4, growth prospects will rise. The key is inflation. 10-year Treasury yields spiked over 25 basis points in just a few weeks. Too far, too fast. Look for some consolidation. Look for higher rates overall in the coming months. Higher earnings and higher rates will keep volatility high, but those aren’t the ingredients for a huge correction or a huge burst higher. Expect the volatile sideways movement of Q3 to continue into next year. Seasonally, however, expect Q4 to recover some from September fears as the Delta variant fades.

Today, Alicia Silverstone turns 45.

James M. Meyer, CFA 610-260-2220

Additional information is available upon request.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « October 1, 2021 – Concerns, they are aplenty. Markets ended September on a sour note, as major averages tested last week’s spike lows. The key to the next 5% move revolves around equities holding near current support levels. Near-term headwinds are compounding, pointing to more downside risk. Rest assured, this bull market is not over yet.
Next Post: October 11, 2021 – Markets remain volatile as growth slows, interest rates rise, and Washington politics remain a mess. Until supply chain problems are resolved the picture is unlikely to change. Demand is strong but much of it is unfilled. Perhaps it is time for Washington to take notice. »

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  • January 27, 2023 – January strength continues to pull money in from the sidelines as FOMO is creeping back into the market. A 5% jump in the opening month historically portends to a solid year. While earnings are coming in mixed and guidance even more muted, it is the stock’s reaction that matters more.
  • January 25, 2023 – Microsoft’s somber outlook will throw a bucket of cold water on stocks this morning. While the reaction to a weak outlook is likely to be less severe than the pummeling tech stocks took after third quarter earnings reports, the news is likely to burst the recent bubble of optimism that an all-clear signal will be sounded imminently. Market volatility continues for now without setting interim new highs or lows.
  • January 23, 2023 – Stocks remain in a trading range, pushed higher by declining long-term interest rates and pushed lower by economic fears. While markets trade within a range, there are winners and losers reacting to their own set of fundamentals.
  • January 20, 2023 – 2022 was a battle over inflation and how high interest rates would go. 2023 is turning into a battle over recessionary conditions and how much negative news is priced into stocks and bonds. There is wide disagreement on both, leading to an even cloudier picture for investors.
  • January 18, 2023- It’s earnings season. Goldman Sachs’ weak numbers yesterday sent stocks lower. A few good earnings reports will move them in the other direction, at least for the next two weeks. Meanwhile we are seeing rotation back to early cycle names, a good sign. Picking tomorrow’s winners means looking forward, not chasing what led the market in the last bull run.
  • January 13, 2023 – Finally, a CPI report that did not send shockwaves through markets. A relatively in-line update with the first month-over-month decline in prices was welcome news. This continued a streak of declining monthly inflation reports and should show the Fed that it is time to slow their aggressiveness. Things will not be that easy though.
  • January 11, 2023 – Earnings season kicks off Friday. December CPI data will be released tomorrow. Both could be market moving. The expectation is that inflation will continue to moderate while earnings are likely to decline slightly.
  • January 9, 2023 – Friday’s rally was a celebration of the fact that wage increases are showing clear signs of moderating. The Fed is winning its battle against inflation and can hopefully stop raising short-term interest rates soon. The impact of higher rates is already priced into stocks. The effect on earnings will be seen shortly as corporate managements share their outlook when they report 2022 earnings. That collective optimism or pessimism will determine the near-term path for stock prices.
  • January 6, 2023 – A calendar flipping to a new year causes some near-term movement for beaten down stocks and yesteryear’s winners, but the economic landscape does not change overnight. Data so far this week has been constructive, with ADP employment metrics, job losses and other reports coming in stronger than expected. Good news is bad news for anyone hoping the Fed will ease in 2023.
  • January 4, 2023 – The die has been cast. The Fed in 2023 will finish its work to defeat inflation. While that may mean short-term pressure on economic growth and corporate earnings, the end result will be better times and lower inflation ahead. Although there might be some pain early in the year, the investment outlook will brighten considerably as the year unfolds.

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