The Wall of 'I'm Not Worried' The Wall of 'I'm Not Worried'\images\insights\article\woman-watching-sunset-small.jpg September 24 2021 September 24 2021

The Wall of 'I'm Not Worried'

The arrival of favorable seasonality supports bullish forces.

Published September 24 2021
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It may be too soon to call “peak bottleneck” (more below), but Q3 looks to be the bottom for the current slowdown. Citigroup’s Economic Surprise Index has turned up, ending a prolonged downward move, and the Atlanta Fed’s tracking estimate for Q3 real GDP also ticked up, signaling stabilization after summer’s deceleration. Also, Conference Board leading indicators surprised, rising sharply in August (more below). The Fed meaningfully raised next year’s growth forecast and indicated the first rate hike will come late next year. The rosier 2022 growth outlook encouraged the market, with equities rallying strongly through Thursday, more than offsetting Monday’s sharp sell-off that capped a 5% pullback. Bond yields broke out, with the 10-year Treasury topping 1.4%. This likely was driven as much by accelerated plans for rate hikes and potential taper (it looks to start in November and end mid-summer 2022) as by the Fed’s revised forecasts for higher PCE inflation, as the latter only confirmed what companies have been saying (more below). Stocks’ reversal coincided with the arrival of favorable seasonality and the most oversold conditions for the S&P 500 since the March ’20 pandemic low. Incidentally, after this year’s two prior 5% drawdowns, the S&P rallied 13.5% on average. And over the past 30 years, the final three months have marked the strongest stretch for stocks.

Unfortunately, problems with chip and labor shortages and shipping will drag out into ’23. These bottlenecks are proving costly for U.S. firms. Automakers, for example, are sitting on big inventories of components but are waiting for chips, which either can’t be bought or are stuck at some port or airfreight terminal. Builder Lennar reported missing expected home deliveries due to a lack of raw materials and a tight labor market, and FedEx disappointed in part because shipping rates are rising at their fastest pace in a decade. Retailers already are warning that holiday shoppers may want to buy specific presents they have in mind early, if they can buy them at all. All of this suggests inflation likely will be stickier than the ill-defined “transitory” Chair Powell and President Biden prefer. The good news is that, while potential sales may be delayed or even foregone due to the disruptions, many companies are passing on their higher costs. S&P operating margins keep making new highs—now at 17%—and the bias continues to be higher for 2022 earnings (the latest average estimate of $222 for the S&P is $5 higher than it was in August). Historically, it’s not until operating margins roll over that equities face much danger.

Political risk over the looming debt ceiling may be the biggest near-term market worry, with a lot of talk about default in coming days and weeks. But default’s very unlikely. Moody’s says it could cost 6 million jobs, $15 trillion in household wealth and push the economy into a recession. This isn’t an issue the Dems can afford as they seek to salvage most of their $3.5 trillion “soft” infrastructure reconciliation bill. It doesn’t help that Biden’s favorability ratings keep plumbing new lows. Rising yields and economic re-acceleration are tailor-made for beaten-down Value and small-cap stocks. ISI notes October and November have been the best two months for large-cap Value over the past 10 years—the Russell 1000 Value Index has gained 5.3% on average in November alone the past 5 years. And the 6-month performance spread between the small-cap oriented Russell 2000 and large-cap dominated Nasdaq 100 currently falls into the 5th percentile of every historical observation, Strategas Research notes, a condition from which forward Russell 2000 returns have tended to be strong. It’s hard not to be bullish with the Fed’s balance sheet topping $8 trillion and expanding, the fed funds rate pinned near zero, the consumer’s balance sheet healthier than it’s been in decades and the economy re-accelerating. This Wall of “I’m not worried” is formidable.


  • New home sales surprise They jumped 1.5% in August as the available supply ticked up and were revised sharply up for July. Last month’s reading was the highest since April. The median sales price rose slightly but still set a new high ($390.9K) and remained significantly above the year-ago level ($325.5K).
  • Builders are ramping up as quickly as they can Led by a surge in multi-family units, housing starts and permits surprised, rising a respective 17% and 14% year-over-year in August and pushing both well ahead of pre-Covid levels—a tailwind for GDP going forward.
  • Growth set to pick up Conference Board leading indicators jumped in August, fueled by positive contributions from all components except consumer expectations for business conditions and average weekly manufacturing hours. The index has risen at a 13% annual pace over the past six months, with widespread strength among index constituents.


  • Bottlenecks weigh on manufacturing … Factory activity slipped to a 5-month low in Markit’s initial read on September as supply constraints and material shortages dampened output. Trucking/shipping issues and capacity shortages led to one of the greatest deteriorations in vendor performance on record. On the plus side, overall activity remained elevated.
  • … services, too Markit’s preliminary take on September put non-manufacturing activity at a 14-month low, with new order growth its slowest since August 2020. The combined manufacturing/services reading dropped to 54.5, a 12-month low but still comfortably expansionary.
  • Existing-home sales slip, but … August’s 2% decline represented sales that have “closed,’’ and thus lag other housing metrics tied to traffic. Those have started to turn up, as reflected in September’s rise in homebuilder confidence and increases in weekly mortgage purchase applications to a 5-month high.

What else

Evergrande canary in the coal mine? BCA Research views the debt-laden Chinese property developer’s seemingly imminent demise as a sign of vulnerability in global real estate, which is now trading at its highest valuation ever. It notes house prices in the U.S. are now more extended versus rents than at the peak of the credit boom. Then again, China’s property issues are somewhat unique—it has so many empty apartments (90 million) that it could house the entire populations of either Canada, France, Germany, Italy or U.K. with room to spare.

Maybe anti-maskers just care about the environment Bank of America shares that it takes 450 years for a facemask to biodegrade in the ocean versus 50 years for a Styrofoam cup and 20 years for a plastic cup.

Everybody is talking about crypto Just one Bitcoin transaction uses more electricity than America ever used between 1700-1878.

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Tags Equity . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Past performance is no guarantee of future results.

Bond prices are sensitive to changes in interest rates, and a rise in interest rates can cause a decline in their prices.

Citigroup Economic Surprise Index: A gauge that measures how regularly scheduled reports on the economy compare to the consensus of Wall Street forecasts.

Gross Domestic Product (GDP) is a broad measure of the economy that measures the retail value of goods and services produced in a country.

Nasdaq-100 Index: Capitalization-weighted and includes 100 of the largest non-financial companies, domestic and foreign, in the Nasdaq National Market. In addition to meeting the qualification standards for inclusion in the Nasdaq National Market, these issues have strong earnings and assets. Indexes are unmanaged and investments cannot be made in an index.

Personal Consumption Expenditure (PCE) Index: A measure of inflation at the consumer level.

Russell 1000® Value Index: Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values. Investments cannot be made directly in an index.

Russell 2000® Index: Measures the performance of the 2,000 smallest companies in the Russell 3000 Index, which represents approximately 8% of the total market capitalization of the Russell 3000 Index. Investments cannot be made directly in an index.

Small-company stocks may be less liquid and subject to greater price volatility than large-capitalization stocks.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

Stocks are subject to risks and fluctuate in value.

The Conference Board's Composite Index of Leading Economic Indicators is published monthly and is used to predict the direction of the economy's movements in the months to come.

The Markit PMI is a gauge of manufacturing activity in a country.

The Markit Services PMI is a gauge of service-sector activity in a country.

The National Association of Home Builders/Wells Fargo Housing Market Index is a gauge of how well or poorly builders believe their business will do in coming months.

Value stocks may lag growth stocks in performance, particularly in late stages of a market advance.

Federated Equity Management Company of Pennsylvania