2021 In Review
While the S&P 500 eked out a 0.23% positive return (as seen in the chart below), the quarter was filled with landmines as companies that had once been providing excellent returns reverted from their highs of the year. While we will provide you our normal updates on what is going on in our markets, we will also dispel why we believe the concerns listed above should not be concerns for you as an investor with Polaris Wealth.
By almost any account, investors have been rewarded with investing in the market this year. While performance has waned in recent months, the S&P 500 is still up 14.68% for the first nine months of the year (as seen in the chart below).
While large-cap growth and large-cap blend provided positive performance for the quarter, the markets were not kind to investors in other segments of the market.
Small-cap investments suffered the most, with small-cap growth losing 5.75% for the quarter.
Large-cap growth now has the top year-to-date performance of any of the nine segments of the market.
There are a lot of reasons to be bullish about the market for the rest of this year and throughout 2022. The estimated earnings growth for third quarter is 27.6%. If correct, this will be three straight quarters with 20%+ earnings growth.
As seen in the chart provided, earnings estimates for 2022 and 2023 are predicted to be even stronger than the earning in 2021.
As you can see from the charts provided, Fed Futures indicate that there is no chance that the Federal Reserve will raise rates in 2021. It is very unlikely that the Fed will raise rates by mid-year. Probabilities of a rate hike do start increase during the second half of 2022. The furthest Fed Futures indicate that the highest probability
is that the Fed will raise rates once by 25 basis points between now and February 2023. The next highest probability is that the Fed will not raise rates at all.
Even if the Fed were to raise rates by 50 basis points, we do not believe such a move would have any impact on the long-term growth expectations.
While we believe inflation will remain higher for a longer period of time than we first projected, we do think that it is a temporary concern point. Don’t believe us? Look at how the market is reacting.
A lot of investors look to gold as an inflationary hedge. Why is gold down for the year if inflation was really something that institutional investors were hedging against?
Another concern point that some of our investors have raised, and certainly something that was weighing on the markets their last few weeks of the quarter was the potential government shut down. We are going to steer clear of the politics behind this stalemate and concentrate on the impacts on the market.
There have been ten government shutdowns over the last 45 years. As you can see from the chart provided, half of those were during Carter’s administration. The markets are benign during government shutdowns, with the last four shutdowns providing investors with a positive return while the government was shut down.
We have said this before, and we’ll say it again…“Bull markets climb a wall of worry.”There are plenty of things to be concerned about, but how many of them really have a direct negative impact on the stock market?
We have shown you that most government shutdowns have little to no impact on the markets. The drops that occurred during the Carter and Ford administrations were more to do with the current economic environment than the actual shutdown. We saw the markets rally during the last four government shutdowns. So why fear it?
There is the threat of taxes being raised to pay for all of the stimulus programs that have already occurred, and the new ones being proposed. While none of us like to pay taxes, these types of increases have historically not had a negative impact on the markets. There have been thirteen tax hikes over the past seventy years. Only once have we seen the markets tumble as a result.
Will inflation have an impact on your portfolio? Inflation has remained stickier than we originally thought, but there is no evidence that would indicate that we are heading into an elongated period of time (like the late 1970s and early 1980s) of hyperinflation. There are several things creating this temporary lift in inflation. The best way to combat inflation is to grow your portfolio. Getting too conservative with your portfolio will simply lower your real return (your portfolio’s return minus inflation).
We remain very bullish going into the fourth quarter and we look forward to that momentum carrying us into 2022. And we are not alone. Goldman Sachs has predicted a 9% rally during the fourth quarter. An aggregate of Wall Street analysts has predicted the markets will increase in value by 15% over the next 12 months. This does not mean that things will be easy. Investors are on edge. Sentiment swings almost on a daily basis and there will continue to be a tug-of-war between value and growth until a clear winner emerges. We are very confident that we will successfully navigate these turbulent times as we have done in the past.