The S&P 500 and Nasdaq indexes fell 4.69% and 5.69% respectively in September. YTD, the indexes are up 16.97% and 14.48% respectively.
International equities, as measured by the MSCI EAFE, fell 3.19% in September. YTD, the index is up 6.23%.
American workers’ personal income rose 1.1% in July and 0.2% in August. Personal spending rose 0.8% in August which is a positive sign for economic growth.
As of August 2021, the unemployment rate sat at 5.2% below the 50-year average of 6.3%.
EYES TURN TO WASHINGTON
Markets have turned their eyes to Washington as Congress debates raising the debt ceiling before the government runs out of money. If the government runs out of cash, it could miss Social Security payments, as well as federal employee, veteran, and military paychecks. Goldman Sachs has estimated that if the ceiling is not raised, the Treasury may need to halt more than 40% of payments. If the government defaults on their obligations, the repercussions could leave markets in a daze of uncertainty moving forward.
Congress must reach a deal to raise the debt ceiling by mid-October. Raising the debt ceiling does not authorize new government spending, but rather, allows the Treasury to issue new debt to cover spending that has already occurred. Since World War I the debt ceiling has been modified or raised 98 times, as reported by the Congressional Research Service. It now appears that a possible short-term agreement in principle has been reached by Congress, but it only pushes out a final resolution until December.
On September 22nd the Federal Open Market Committee (FOMC) voted to maintain the federal funds rate at a range of 0.00% – 0.25%. They also reaffirmed their commitment to purchase $120B in assets per month.
The FOMC is now evenly split in regards to a rate hike in 2022. For 2023, they are projecting three rate hikes with another three rate hikes in 2024. In regards to asset purchases, Chairman Powell’s comments indicated that a tapering will occur in the near future, but the timing has yet to be determined. During the global pandemic, the Fed took an extremely accommodative stance by lowering interest rates to well below historic norms, while also committing to billions of dollars in asset purchases.
ECONOMY LOOKING FORWARD
The Fed recently revealed forward guidance via an updated summary of economic projections. GDP for 2021 has been downgraded from 7.0% to 5.9% year-over-year in 4Q21. This is largely due to the impact of the delta variant and persistent supply chain issues. Looking forward, the Fed has raised their GDP projections for 2022 by 0.5% to 3.8%, and in 2023 by 0.1% to 2.5%.
As to unemployment, the Fed has increased their estimate for the 4th quarter from 4.5% to 4.8%. This is a result of decreased momentum in hiring during August.
The comments and projections made by the Fed indicate confidence in the economy going forward. They believe that the economy has made significant progress from the effects of the pandemic and expect that progress to continue into 2022. As the economy regains its strength, however, the Fed would like to maintain flexibility in their response to an ever-changing economic environment.
DISCIPLINED OUTLOOK THROUGH THE NOISE
There have always been many reasons to be optimistic or pessimistic about the markets. In this age of information and news media, it seems as if the sky is falling every few days. The truth is no one can predict the markets, and you should stray away from anyone who thinks they can. What we do know is that markets have persisted through events such as The Great Depression, two world wars, political uncertainty, double-digit inflation, international conflicts and more. As millions of people put their collective efforts into improving their respective industries, the overall economy and component companies steadily increase in value. This can be easily overlooked during times of short-term market swings.
We are here for you to discuss any changes to your financial life. Our goal is to assist you in constructing a portfolio with an asset allocation that you are comfortable with during good times and bad. We look forward to connecting with you and continuing to be your partner along your financial journey.
Platt Wealth Management