We are in the midst of what has heretofore been the seasonally weakest time of the year for stock performance. In as much as stock performance is driven by earnings surprises, it is not too far a stretch to understand this weakness. Historically, the summer quarter, packed with employee vacations, makes outsized achievements more difficult, in turn, the dampening earnings prospects. But changing work habits, work from anywhere, and Covid fears have so impacted businesses, we wouldn’t necessarily expect seasonal patterns to hold true.
The real issues impacting the Market are inflation, inflation, and inflation and the Fed’s anticipated reaction to said inflation. Do they end assets purchases sooner or later? Is this followed by interest rate increases any time soon? Without the liquidity help, does the Bull market end? These are the questions investors should be asking.
For our part, we believe that inflation fears may not be quite as transitory as the Fed hopes. The Fed is pinning its view to the dramatic supply chain disruptions caused by the pandemic and the re-opening of the economy trade creating excessive demand. We would add terrible proposed fiscal policy, energy policy, and new regulatory policies to the list. Yet these fears may be quite transitory as well owing to mid-term elections in about one year.
Moreover, the secular trends underlying the stock market moves are extremely powerful and are not likely to abate. The pace of change, may accelerate or decelerate, based on the aforementioned factors, but change is coming regardless. For this reason, we remain Market optimists.