What You Need to Know
- Earnings are better than expected, consumer demand is robust and annual GDP is on track for 6%-7% growth.
- Forward-thinking companies that began preparing for supply chain disruptions 12 months ago are well positioned to benefit from renewed consumer demand.
- In a year of back-and-forth market rotation, value stocks make sense in the historically strong fourth quarter.
The fourth quarter is historically a strong period of the year for the equities market, and this year that seasonal advantage appears on track. Earnings are coming in better than expected, consumer demand is robust and GDP is on track to finish the year at 6%-7% growth. Earlier this month, all six of the largest U.S. banks beat earnings expectations for the first time in years, and we will be watching closely as more companies announce results in the coming weeks.
Despite the recent market choppiness, the economy is stronger than many market strategists believe, and I see considerable room for growth in key cyclical and reopen sectors. Those who have called for a market correction are underestimating the amount of liquidity still in the system.
The Federal Reserve is set to start cutting back on its asset purchases soon, but even with the taper, it will still be injecting significant liquidity into the system through mid-2022, to the tune of roughly $105 billion per month. And the new infrastructure spending, which will likely amount to $1 trillion to $2 trillion, will eventually come and continue to stimulate economic activity.
Heading into Q4, I continue to focus on macro fundamentals to guide my portfolio choices. Through year-end, I am seeking opportunities in cyclicals and reopen stocks, emphasizing value vs. growth.
What Your Peers Are Reading
Macro Indicators Point to Growth, Higher Inflation
Persistent supply chain issues and resurgent demand are stoking inflation. The September consumer price index (CPI) rose 5.4% compared with September 2020. Some prices are rising rapidly and are clearly not transitory. The indexes for food and shelter rose in September and together contributed more than half of the monthly all-items seasonally adjusted increase. Rent rose 0.5% versus August — an enormous number, and suggests the Fed is behind the curve in monetary policy initiatives.
Many areas of supply chain disruption will not be resolved quickly. Just look at the semiconductor shortage: At a conference last week, Commerce Secretary Gina Raimondo remarked: “This is one I feel confident saying it’s not going to be fixed in a month or two, or six, or 12 months.”
While manufacturing companies face ongoing supply issues, especially the auto industry, for the third quarter as a whole total industrial production rose 4.3% at an annual rate, its fifth consecutive quarter with a gain of at least 4%. Industrial production remains just 2% below pre-COVID levels, according to Merion Capital.