Calyx Q3 2021 Market Comment

During the first 6 months of the year, we were convinced the markets would benefit from government stimulus checks and businesses reopening. During that time the economy returned to normal, and our clients profited from being fully invested, with little cash on the sidelines. It made sense to be all in during the first six months of 2021.  As we began Q3, we decided to cut all equity and ETF positions by half, taking profits and reducing exposure. The stock market trend may continue higher, so we are still 50% invested, but the chances of a market selloff are increasing quickly. At this point in the cycle, we believe it is better to reduce our exposure, saving cash to purchase shares at lower prices following the inevitable correction.

Calyx Third Quarter 2021 Comment

   As we enter the dog days of summer, the stock market is at an all-time high. Strong earnings in retail, banks, and technology are taking the market higher while continued Covid warnings in the media only seem to pause the upward trends. 

During the first 6 months of the year, we were convinced the markets would benefit from government stimulus checks and businesses reopening. During that time the economy returned to normal, and our clients profited from being fully invested, with little cash on the sidelines. It made sense to be all in during the first six months of 2021.  

   Along with the recovery employment has returned too, although many jobs are being left unfilled as unemployment benefits compete with wages, keeping some workers from going back to work. Competition for those who have returned has exerted upward pressure on wages. Increased costs to employers, along with rising home prices, increases in gasoline, food, and autos are all combining to create inflationary pressures we hope are temporary. We note that Fed has pledged to maintain low interest rates to assist the recovery but fear the central bank will eventually need to increase rates to avoid runaway inflation. 

Global Politics

 Global politics and power are reflecting decades of change in the flow of world trade. Manufacturing outsourcing, control of natural resources, and government regulation have all contributed to a rearrangement of the global pecking order. While the U.S. continues be the world’s largest consumer nation China is not far behind, followed closely by the rest of Asia. Outsourced manufacturing has become distributed across the globe relegating the US to a producer of services rather than goods. While the US still dominates in key technologies and innovation, the erosion of our intellectual property has left our economy vulnerable. 

   Through their Silk Road initiative, China has cultivated relationships with clients in Asia, Africa, and Latin America. In Europe, Russia has used both oil and military intimidation to retake control of countries on its border. These developments can become threats in a world dependent on free trade. The pandemic was a stark lesson on how outsourced manufacturing can pinch our domestic economy. Shortages of raw materials and supply chain disruptions revealed vulnerabilities in our economy, while limited access to foreign markets and investment brought our trade relationships into focus. How the U.S. navigates these challenges will determine our continued access to materials, labor, and markets. 

Money

The Fed, along with the central banks of Europe, China, and Japan have pumped massive amounts of money in the world’s banking system. This has driven up the price of all assets, including stocks, bitcoin, houses, and equities, regardless of profitability. This increase in the world’s money supply has forced interest rates are so low that inflation outpaces most bond returns. Too much money can drive questionable investing, forcing investors to take undue risk in the search for return. Many believe this fear of missing out (FOMO) is helping to drive the stock market higher and higher.    

Inflation  

   Inflation has become a concern across several broad areas, including manufactured goods, energy, labor, housing, and food. 

Manufacturing supply chains were disrupted last year as canceled orders, closed plants and borders, and shipping bottlenecks all contributed to price increases. Over time we should see resolution of these issues and the return of normal prices. Wage hikes in response labor shortages should ease when federal unemployment benefits end. Home prices are reflecting people moving out of urban areas and high tax states in favor of remote work options. Once companies call employees back at work it is quite possible to see prices and rents retrench.  Record heat and water shortage in the west and southwest has raised prices for fruits and vegetables while some areas of the Midwest have seen grain and meat prices jump. Oil production has shifted back to the middle east, Iran, and Russia. These OPEC members will restrict production to keep prices high. Most price rises due to supply constraints will be resolved in months. Food prices depend on the weather, but wages and energy will stay higher. Longer-term we should see prices for houses, cars, lumber, food, moderate.  

   Stocks have come a long way already this year, but because markets usually anticipate the future, we think there is risk of a severe market correction in the coming weeks and months. If inflation or an increase in interest rates cause a recalibration of expectations, it could get ugly fast. Earlier in July we had a scary day when rumors of returning COVID restrictions swept the markets and the Dow, at one point, was down almost 1000 points. That rumor was ignored the following day and the market recovered, but we had a glimpse of how fast sentiment can change. This week it was announced that vaccine passports and masks will be required in New York City to enter many indoor venues, including restaurants, gyms, and entertainment. At the same time abrupt flight cancelations by airlines as they try to cope with changing regulations caused confusion and passenger violence on flights. Threats of new Covid variants could provoke a new round of restrictions or shutdowns.  These kinds of restrictions and fear of another economic slowdown could be the catalyst for a correction.    

Finally   

As we began Q3, we decided to cut all equity and ETF positions by half, taking profits and reducing exposure. The stock market trend may continue higher, so we are still 50% invested, but the chances of a market selloff are increasing quickly. At this point in the cycle, we believe it is better to reduce our exposure, saving cash to purchase shares at lower prices following the inevitable correction.

We hope you and your families have wonderful summer break.

Ed, Branson & Claudia

At Calyx, we help families protect and manage their financial resources.  We are a financial advisor and investment manager that partners with our clients to administer their financial affairs with personal attention and active risk management. Calyx is also advisor to charitable trusts and endowments, working with committees of faith-based organizations to preserve their legacy while providing operating income. We are sensitive to the investment needs of these clients while working within the guidelines they have established to reflect their principles.

   www.calyxadvisors.com