January 2020 - INVESTMENT ADVISORY NEWSLETTER

OCTOBER 2021 - INVESTMENT ADVISORY NEWSLETTER

THE ECONOMY For months, the world economy has expanded at a healthy pace at home and abroad as industries that were shut down in the pandemic reopened but nevertheless remain below their pre-pandemic levels. Supply chain backups have resulted in shortages of all types of products that use semiconductors including automobiles, with auto makers idling production. Computer hardware, and even home appliances, are examples of supply shortages holding back many parts of the economy. Dozens of container ships are backed up at Southern California ports, waiting their turn to unload products meant to fill American store shelves through the holiday season. Builders are having a hard time obtaining windows, lumber, and other key products needed to complete new homes. Restaurants have cut back hours for lack of kitchen help. Reopening restaurants and performance arenas is one thing. Hiring staff is another! The hard-to-predict dynamics of Covid variants could easily throw the transition to a healthy post-pandemic economy off course. One looming risk is if political leaders mismanage things in the world's largest and second-largest economies. In the United States, a standoff over raising the federal debt ceiling that brings the U.S. to the brink of default, and the fate of the much publicized $3.5 trillion infrastructure bill is still being debated with political partisanship on wide display. Senate Republicans insist that they will not vote to increase the federal debt limit, while also planning to filibuster Democratic attempts to do so. Then there is the unwillingness of many to get Covid vaccinated and questioning the legality of vaccine mandates. On the other side of the Pacific Ocean, the Chinese government has its own challenge with Evergrande, the largest Chinese real estate company, struggling to make payments on $300 billion worth of debt. Real estate has played an outsize role in China's economy for years and represents upwards to 30% of China's economy, so a bubble burst could impact world GPD by up to 6% in a worst-case scenario.

The Organization for Economic Cooperation and Development last week projected that the world economy would grow 4.5% in 2022, downshifting from an expected 5.7% expansion in 2021. Its forecast for the United States shows an even steeper slowdown, from 6% growth this year to 3.9% next year. The Federal Reserve's most recent forecast calls for 5.6% growth for 2021 with 4.2% inflation, and 3.6% GDP growth with 2.6% inflation next year. The most contentious forecasts offered for next year are those expecting declines in inflation. CNBC and The Wall Street Journal reported this week that Costco, Nike, and FedEx are warning there's more inflation set to hit consumers as holidays approach and that they expected inflation to be a problem next year. Persistent inflationary pressures come at a time when retailers are preparing for the holiday shopping season ? Halloween, Thanksgiving, and Christmas, then into the new year. The pandemic has brought with it a relentless slew of factors that has made inflation an economic unknown after a generation of mostly moderate price pressures.

MARKET PERFORMANCE ? Uncertainty and Potential U.S. & China Defaults Roil World Markets

Energy, Commodities, and Financial Services were the only sectors posting advances in October with interest rates and inflation at higher levels. Technology, Precious Metals, most Overseas markets, and Utilities all posted monthly losses in excess of 5%. Mounting worldwide uncertainty, especially at month end, produced the worst September market returns in over 10 years!

? S&P 500 ? down 4.8 for September & up 14.6 % YTD

? NASDAQ OTC? down 5.8% for September & up 12.9 YTD

? All World w/o U.S. ? down 4.1% for September & up 6.1% YTD

? Global Bonds ? down 1.1% for September & down 2.1% YTD

? Balanced Index ? down 3.9% for September & up 6.0% YTD

Page 1 of 2

October 2021 - Investment Advisory

10/1/2021

RECOMMENDATIONS ? Markets React to Covid, Inflation, and China / U.S. Financial Woes

World markets teetered early this month as Chinese construction giant Evergrande appeared on the verge of defaulting on $300 billion of debt. The company thus far has missed two interest payments to creditors, and it remains to be seen if this will overflow and impact creditors outside of China. Though not as large as the collapse of Lehman Brothers, a default would make it one of the biggest in history. In September 1998, a group of 14 banks and brokerage firms invested $3.6 billion in Long-Term Capital Management (LTCM) to address the hedge fund's imminent collapse and prevent cascading banking problems that could impact our banking system. Alan Greenspan, the Federal Reserve chairman, defended the central bank's role in averting the collapse of Long-Term Capital Management saying that it had acted out of concern for the stability of the financial markets. Evergrande's financial woes appear to be somewhere between those of the LTCM bailout and Lehman Brothers' collapse. Real estate represents 30% of the Chinese economy. Evergrande's troubles were largely foreseen by investors watching China's growing property bubble. It remains to be seen what the Chinese government will do to stabilize their financial markets and economy. U.S. and world markets were hit hard by the Chinese Evergrande's near bankruptcy. Real estate represents upwards of 30% of China's economy, so a bubble burst could impact world economic growth by up to 6% in a worst-case scenario.

Uncertainty is rampant in Washington. Our polarized electorate is not necessarily on board with any decisions that are forthcoming with regard to the infrastructure bills, and a debt ceiling decision that might potentially damage our credit standing in the financial community. The medium and long-term policy path for the Federal Reserve remains unclear even as the central bank appears to be getting closer to tapering their bond purchases while promising to keep short-term interest rates low. Covid may keep the economy from reaching a full recovery which would imply that continued stimulus is in store: i.e., keep interest rates low and continue quantitative easing to stimulate the economy. The markets reacted negatively to all the uncertainty that surfaced this month. Are we going to pass an infrastructure bill or default on our national debt? Is Jerome Powell going to be reappointed to be to chair the Federal Reserve? Inflation is such that the Fed may have to raise rates if the pundits are correct in believing that inflation will remain high even if the economy slows next year. Add it all up, including China's Evergrande issues and Europe's natural gas supply chain issues that are raising energy prices, and you get a short-term interest increase that roiled the U.S markets in September. Any increase in interest rates, for any reason except healthy GDP growth, hurts the markets. We got a bucket full of that this month! The S&P500 is up 1.4% in the last 3 months, as opposed to 15% gains in the first half of the year. Stay tuned!

On the positive side: ? The Federal Reserve is set to begin tapering bond purchases without raising interest rates this fall. ? Covid-19 vaccines and boosters are being approved by the FDA, supporting mass vaccination. ? A multi-billion infrastructure package is near approval with more to come.

On the negative side: ? The Delta variant is not fully contained at home as summer ends. ? The economy is slowing but is still strong. ? US/China, financial issues could derail the markets. ? Multi trillion-dollar deficits are with us for the foreseeable future. ? Inflation is a concern with supply chain issues raising costs.

We reacted to the China's Evergrande's headlines by reducing our overseas holdings and sold our S&P500. We exchanged these holdings for energy fund ? the only sector advancing when the exchanges were made. We expect October to be volatile and hope for a year-end rally that usually follow a difficult September-October timeframe. So says The Stock Trader's Almanac. Let's hope so.

RELATIVE STRENGTH RANKINGS

Relative strength rankings indicate short-term (1-3 months) historical performance.

No-Load Funds that are highly diversified should constitute the "core" holdings in a portfolio.

? JABAX

Janus Balanced

? RYSPX

S&P500 Index - if a recovery materializes

? PORTX

Trillium ESG Global Equity ? if China settles down

? VLAAX

Value Line Asset Allocation

Industry Specific Sector Funds

? RYEIX

Rydex Energy ? If Europe's supply chain problems persist

Page 2 of 2

October 2021 - Investment Advisory

10/1/2021

 ................
................

In order to avoid copyright disputes, this page is only a partial summary.

Google Online Preview   Download