In today’s Steady Investor, we look at key questions investors are asking, and factors that we believe are currently impacting the market such as:
Slower than Expected U.S. GDP Growth in Q3 – At the outset of the year, many economists were anticipating strong vaccine uptake would steadily decrease pandemic risk, giving way to booming growth in the second half of the year. The economic forecasting firm, IHS Markit, thought in mid-July that the U.S. economy would grow by 7.8% in Q3 – today, their forecast has fallen to 3.6%. U.S. consumer confidence has also sunk in recent months, also tied to the rapid spread of the Delta variant and re-introduction of mask restrictions and in some cases, vaccine mandates. The Conference Board’s consumer confidence index1 dropped from 115.2 in August to 109.3 in September, signaling those consumers were less enthusiastic about spending as the summer wore on. Supply constraints, which we have written about many times in this space, are also weighing on overall economic growth. Taken together, these headwinds are likely to show a marked slowdown in U.S. GDP growth in Q3, but the upshot is that economists across the board are in turn raising growth estimates for Q4 and the first half of 2022. The perfect storm for growth would be that Covid-19 cases, hospitalizations, and deaths continue to fall as supply chain issues slowly resolve themselves.2
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Never Panic! Here’s How to Use Market Volatility to Your Advantage
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Looming Government Shutdown and Debt Ceiling Standoff – Many readers are seeing news of a looming government shutdown and debt ceiling debate and think, “here we go again.” Raising the debt ceiling has almost always been a routine affair – Congress has raised the debt ceiling close to 100 times in the postwar era. Raising the debt ceiling means enabling the U.S. Treasury to sell bonds in order to pay for spending that Congress has already authorized. Raising the debt ceiling also means staying current on existing government obligations, like Social Security payments, tax refunds, payments to military families, and so on. Treasury Secretary Janet Yellen told Congress this week that the government would be unable to pay its bills if lawmakers did not raise the debt ceiling by October 18, saying America could “default” for the first time if action was not taken. This is scary language, but there is also some hyperbole here – the U.S. Treasury is required to pay bond interest first, and tax revenues should allow the U.S. to continue making interest payments on time. Ms. Yellen’s warnings of “default” are seemingly more designed to get Congress to act, versus being an actual risk for the U.S. in the near term. Not raising the debt ceiling would mean missing entitlement and other payments, which is by no means a good outcome and could lead to volatility. But talk of “default” needs to be examined more closely.4
Home Prices Continue Soaring to New Records – The U.S. housing market continues to remain strong. The S&P CoreLogic Case-Shiller National Home Price Index posted yet another record for year-over-year home-price increases, notching a 19.7% gain from July 2020 to July 2021. The index measures average home prices in major metropolitan areas across the U.S., so does not even factor sharp growth seen in emerging towns and small cities that have seen a surge of new buyers leaving the cities for bigger spaces. The 19.7% y-o-y gain marks the sharpest increase since the index began keeping records in 1987.5
Longer-Than-Expected Transitory Inflation – The Federal Reserve and Chairman Jerome Powell have long held that inflation in the U.S. is only temporary (“transitory”), as a surge in demand is being met with supply constraints and issues with the global supply chain. But what happens when “transitory inflation” lasts longer than expected? Is it then no longer transitory, but more permanent? Chairman Powell thinks not – in statements this week, Powell said the reopening of the economy is “a process that will have a beginning, middle, and an end,” and that the U.S. has not yet moved through that cycle. In Mr. Powell’s view, the economy will settle into a post-pandemic growth phase where supply chains run smoothly again, demand wanes slightly, and inflation settles back towards the Fed’s target of 2%. Mr. Powell also defended keeping monetary policy accommodative, stating that there is a long history of the Fed not doing enough. Even still, the Fed appears poised to taper bond purchases later this year but remains split on when to raise interest rates, with half of the voting members favoring late 2022 and the other half wanting to wait until 2023.6
Silver Linings in a Volatile Market – It may be hard to find silver linings in a volatile market, but that doesn’t mean they aren’t there!
To help give you additional insight into how you can make the most of turbulent times, I recommend reading our guide “Using Market Volatility to Your Advantage.”7 This guide can help you learn about our insights, based on decades of experience, about how a volatile market may be able to actually help investors refine their strategies and potentially generate solid returns over time.
If you have $500,000 or more to invest, download this free guide today by clicking on the link below.
Disclosure