“Spooky Markets? Stay Smart"

MONETARY

• In the Federal Reserve’s most recent Beige Book publication, it was noted that recent economic activity downshifted slightly relative to the prior reporting periods. The recent downshift was largely attributed to growth being constrained by continued labor and resource shortages causing supply chain disruptions, rather than any demand related issues¹
  • Areas of the economy that have remained strong as of recent include Manufacturing, Transportation, Non-Financial Services, and Residential Real Estate¹
    • The report noted that weaker home and auto sales were primarily a function of lower inventories rather than a demand-side pullback¹
  • Regarding employment, overall job creation continued to rise in the aggregate, although there were differing characterizations of the strength of job creation in certain areas which ranged from “slight” to “strong”¹
    • The Federal Reserve noted that the demand for workers remains very robust, however the supply of labor continues to be a large problem. Various reporting districts noted experiencing “extensive labor shortages” which in many cases was impeding economic growth¹
    • To help ease labor shortages, businesses have been raising wages and offering schedule flexibility to entice workers to return to the labor force¹
  • Regarding inflation, it was noted that overall inflation remains elevated at a level above the Federal Reserve’s long-term average goal of 2.0%. Some reporting districts characterized recent price increases as strong, while others described it as being more moderate¹
    • Input costs were seen as being heavily influenced by persistent and widespread resource shortages. Specific problematic areas included metals and metal-based products, freight and transportation, and construction materials¹
    • Several reporting districts indicated that businesses anticipate passing through higher costs to end consumers in the coming months¹
  • In the press release regarding the Federal Reserve’s September FOMC meeting, significant language was added to indicate the sooner-than-later expectation for a start to tapering its existing asset purchase program²
    • (Federal Reserve) “…the economy has made progress toward these goals. If progress continues broadly as expected, the Committee judges that a moderation in the pace of asset purchases may soon be warranted.”²
      • The current pace of asset purchases is $80B a month in treasury securities and $40B a month in agency mortgage-backed securities²
    • Accompanying the September FOMC release, the Federal Reserve makes updates to its Summary of Economic Projections forecasts³
      • GDP growth now expected to finish 2021 at an annual pace of 5.9% and then moderate to more historical averages around 3.8% and 2.5% in 2022 and 2023 respectively³
      • Unemployment is now projected to decrease to a rate of 4.8% through 2021 before falling even further to 3.8% and 3.5% in 2022 and 2023³
      • Inflation is projected to remain elevated through 2021 at a rate of 4.2% and then moderate closer to a more historical level of 2.2% in 2022 and beyond³

 

FISCAL

• Senate lawmakers reach a deal to avert a potential government shutdown by passing a stopgap measure that will fund the government through early December 2021⁶
  • The short-term stopgap measure is separate from a parallel issue facing congress which entails the need to raise or suspend the debt ceiling by October 18⁶
    • Treasury Secretary Janet Yellen stated that if the government debt ceiling is not raised or suspended by this time the U.S. could run the risk of defaulting on its debt obligations which could have drastic financial consequences⁶
    • Democratic lawmakers previously attempted to pair the recently passed stopgap measure with a debt ceiling increase, however this move was blocked by Republican lawmakers who are opposed to the $3.5T in social infrastructure spending that would likely come along with a debt ceiling increase⁶
    • Instead, there is speculation that Democratic lawmakers will have to use the budget reconciliation process to accomplish both goals of raising the debt ceiling, as well as passing the $3.5T social infrastructure bill⁶

 

GEOPOLITICS

• The United Stated and European Union continue negotiations around the Section 232 steel and aluminum tariffs originally imposed by the Trump Administration in 2018⁷
  • Following the implementation of the steel and aluminum tariffs, the European Union announced retaliatory tariffs on various American exports including motorcycles, apparel, and bourbon whiskey⁷
  • Retaliatory tariffs were then delayed until December 1, 2021 to allow the U.S. and E.U. time to work out a long-term solution for trade disputes⁷
  • Sources close the negotiations say that the U.S. submitted a proposal to the E.U. which included a tariff-rate-quota system. This system would allow for low duty charges for imports of steel and aluminum from the E.U. up to a certain threshold. After the import threshold is breached, duties imposed on additional imports would then increase to a higher level⁷

 

MISCELLANEOUS

• International equity markets react as embattled Chinese property developer Evergrande careens towards bankruptcy as it misses interest payments on some of its dollar-denominated bonds. Market participants expect a formal restructuring of the enterprise to address the nearly $304B worth of liabilities on its balance sheet⁴
  • Sources close to the situation reveal that the Chinese government has already instructed multiple state-backed enterprises in China to begin purchasing some of Evergrande’s assets in an effort to raise cash ahead of a formal restructuring⁵
  • While the exact details of a restructuring are not yet known, there is speculation that Chinese investors and suppliers are likely to be given a great deal of priority over the interests of international investors⁴

 

[See Below for Disclosures & Annotations]

DISCLOSURES

Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The companies presented here are for illustrative purposes only and are not to be viewed as an investment recommendation.

Tax laws and regulations are complex and subject to change, which can materially impact investment results. LPL Financial does not provide tax advice. Clients should consult with their personal tax advisors regarding the tax consequences of investing.

Securities offered through LPL Financial, Member FINRA & SIPC. Investment advice offered through Stratos Wealth Partners, Ltd., a registered Investment Advisor. Stratos Wealth Partners and Wealth Advocate Group LLC are separate entities from LPL Financial.

 

ANNOTATIONS

1. Federal Reserve. “The Beige Book: Summary of Commentary on Current Economic Conditions”. September 8, 2021.
2. Federal Reserve. “Federal Reserve issues FOMC statement”. September 22, 2021.
3. Federal Reserve. “Summary of Economic Projections”. September 22, 2021.
4. The Wall Street Journal. “Evergrande Bondholders Mull Next Steps in Wake of Missed Payment”. September 28, 2021.
5. Reuters. “China asking state-backed firms to pick up Evergrande assets – sources”. September 28, 2021.
6. CNBC. “Senate reaches a deal to avoid a government shutdown”. September 29, 2021.
7. Bloomberg. “EU, U.S. Divided on Steel-Duties Solution as Deadline Nears”. September 29, 2021