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Better Than — Week of September 20, 2021

Written by Steve Orr, Chief Investment Officer, and Greg Kalb, Investment Advisor

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index -0.54 19.24 32.89 17.42 17.86 4,432.99
Dow Jones Industrial Average -0.05 14.58 25.74 12.35 16.40 34,584.88
Russell 2000 Small Cap 0.45 14.00 45.54 10.90 14.25 2,236.87
NASDAQ Composite -0.46 17.30 37.14 25.16 24.73 15,043.97
MSCI Europe, Australasia & Far East -0.64 12.64 26.35 10.12 10.70 2,366.06
MSCI Emerging Markets -2.38 0.57 16.95 10.71 10.41 1,276.78
Barclays U.S. Aggregate Bond Index 0.12 -0.62 -0.12 5.65 3.25 2,377.11
Merrill Lynch Intermediate Municipal 0.03 1.18 2.72 4.93 3.15 320.87

As of market close September 17, 2021. Returns in percent.

Better Than

Halfway through September and we find ourselves with a mixed bag, performance-wise. Last week U.S. stock sectors nearly split, with 6 lower and 5 higher. Energy followed optimistic oil forecasts higher, while unloved utilities brought up the rear. No stock category is positive for the month, but all except small cap and energy are positive for the quarter. Interest rates have barely budged; high yield and investment grade debt continue their slow rise higher.  

Most of last week’s stock market action was confined to a narrow 1.5% range. The S&P 500 dropped below its 21-day moving average and stayed there, creating new resistance. The index spent the next three days banging up against that 4,485 level, being unable to break through. It did dip low enough mid-week to close a chart gap down at 4,441. Roughly half of the S&P 500 members are above either their 20-day or 50-day moving average. Two names worth mentioning are Microsoft and Pfizer. MSFT announced last week that it was raising its dividend by 11%, its 17th in a row. The tech giant also launched a $60 billion buyback program. Pfizer said that it plans to file for emergency use authorization of its COVID-19 vaccine for use in children aged 5-11. 

Friday’s steady march lower took the index below its 50-day moving average for the first time since June 18th. The 50-day level is a psychological pivot for traders. The last time any of the big indices spent time around the 50-day moving average was February and March, building energy for the spring rally.  There should be some volatility on the Friday of quarterly options expiration. That is to be expected. A significant driver of Friday’s and today’s decline centers on China. 

The news headlines miss the fact that none of the indices are breaking down. The mild selling around options expiration last week shows the longer-term Bull is still in place. The shuffling modestly off highs thus far is better than most Septembers by a long shot.

More Bricks

Lots of news headlines are still in front of us before this month is done. Markets climb a “Wall of Worry” in Wall Street parlance. The phrase refers to stock markets reacting to the news of the moment and then looking ahead to possible outcomes. Old bricks in the Worry Wall start with Washington. Pelosi’s line in the sand for a September 27 vote on infrastructure and social spending reconciliation is up in the air. Raising the debt ceiling must happen before mid-October to avoid default. There is a high probability that the President will very soon reappoint Jerome Powell as Chairman of the Federal Reserve, but there are odds on both sides.

The Fed will release its updated “Summary of Economic Projections” this Wednesday. We believe the “dot plot” graph of members' rate views will show more members forecasting rate hikes in late 2022. If this is the case, bond markets could get rattled. Last month’s lower job number, rising jobless claims the last two weeks, and signs that Recovery Inflation (rental cars, airline tickets) is peaking, may let the Fed wait until November to vote on tapering. Recall that Chairman Powell stated at Jackson Hole that the Fed would start reducing (“tapering”) its monthly bond purchases in the coming year. 

New bricks from overseas have been curing for a while but are just now getting attention from traders. These include German and Canadian elections, energy shortages in Europe and China’s Evergrande real estate train wreck. Real estate accounts for only about 10% of China’s GDP but plays an outsized role in debt markets and investor appetite. Evergrande is the largest property developer in the country. They build apartments, high rises and pre-planned communities. Evergrande owns more than 1,300 real estate projects in more than 280 cities. Bloomberg reported that as of last December, buyers had made down payments on more than 1.5 million units yet to be built.

The Chinese government allowed Evergrande and others to grow rapidly using lots of debt. Xi’s government has now decided that real estate is in a bubble and must be scaled down. A mix of regulatory changes and borrowing cutbacks by the government has crippled Evergrande and the firm is likely near bankruptcy. Evergrande has already said it will not be able to pay interest due on a portion of its debt this Thursday. S&P estimates that Evergrande owes suppliers and contractors over $37 billion and at least half of that comes due this year. A paint supplier, Skshu Paint, said that Evergrande settled part of its bills by giving the paint company unfinished apartments. The chief concern around Evergrande and Chinese real estate is that defaults could spread to overseas suppliers and create a “Lehman moment” when one firm’s collapse could spread to many others. We would view that risk as low. The Chinese government will not want to bail out the firm but will likely assist with debt payments or a “bad bank” to help ease the strain. More to come. 

Delta Down

Preliminary data from August suggests ongoing supply problems and the delta variant downshifted U.S. activity. Industrial production rose, but at a much slower rate. Year-over-year IP rose by a very strong 5.6%, well below the peak of 16.5% in May. Hurricane Ida also contributed to lower output. 

Consumer prices as measured by CPI also came in under expectations. In August the BLS basket of goods and services increased 0.3%, clocking a 5.3% per year rate. This rate is right at the recent highs, but August’s results were held higher by gasoline’s 2% rise. The “core” CPI, excluding food and energy, has dropped from July’s 4.5% to 4%. Producer prices continue to rise faster than consumer prices, suggesting more increases to consumers down the road. Additionally, surveys of inflation expectations continue to rise. We think the August dip was just that and expect inflation to finish the year well above 3% and persist well into next year. These levels are justified by continuing supply chain problems, housing inflation and wage gains. 

What else is going up? Retail sales for one. August’s initial estimate came in at a 0.7% increase. Analysts had expected a 0.8% drop, not an increase. Pulling car sales out of the list, sales jumped 1.8% month-over-month. Building materials and online ordering continue to account for most of the gains. Car sales are dropping like a rock, down 14% over the last three months due to parts shortages. The one “good” point about parts shortages is that pent-up demand is building for future car sales. 

Wrap Up

More August data this week should continue the delta down theme. Building permits, existing home sales and Markit’s Purchasing Manager Surveys should all be lower than July. One stat that will be slightly higher is jobless claims, thanks again to delta keeping more folks home. We note that nationally, case counts peaked on August 27th and here in Texas on September 9th. 

The Wall of Worry now has bricks from D.C., inflation (caused by stimulus and shutdowns), delta, hurricanes, Evergrande, Fed tapering and just the fact that it's September. The Stock Trader’s Almanac tells us that this week, coming after quarterly triple witching and before quarter-end, has posted negative returns in 24 of the last 31 years. 

Taking the measure of our indicators, time of year and where we are in the business cycle, we remain overweight in stocks, slightly underweight in bonds and believe a correction, if one is building, would be a buying opportunity versus the start of a bigger move down. 


Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.

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