October 2021 - Echoes of 2013

By: Kyle M. McBurney, CFP

Managing Partner at Highland Peak Wealth

A Very Blah Quarter

An otherwise upbeat quarter for stocks ended with a thud after a tumultuous September marked the S&P’s worst month since March 2020. All three major indexes were lower for the month, with international markets faring only slightly better. Filled with negative headlines and a growing list of concerns, September was a month of choppy trading and a handful of gut-wrenching days. Market concerns that have been percolating for some time came to the surface. Higher inflation – driven in part by supply chain bottlenecks and difficulties – remains a top concern, with uncertainty around Fed activity and global growth. There are far more concerns I can think of, but for our collective psyche, I’ll graciously hit the pause button.

Despite September’s weakness, the S&P 500 managed to eke out a 0.2% gain for the quarter. The third quarter’s modest increase marks the index’s 6th straight quarterly gain from the pandemic. However, the Dow and Nasdaq weren’t so lucky – marking their first quarterly decline since those early days of 2020. Developed International didn’t fare quite as well but hung in there just fine, retreating 0.4% for the quarter.

However, the real pain was felt in Emerging Markets – down 8% in the third quarter. Dogging international markets in September were worries of contagion from Chinese debt-heavy property developer Evergrande. While Evergrande itself is only a tiny part of the index, the genuine concern lies in the possibility of further contagion – with banks and government balances stuck with toxic assets. To be clear, I have a hard time believing that this will be some sort of Lehman Brother or Bear Stearns type event. After all, I would guess that 99.9% of investors had never heard of the company before recent headlines. But I do recognize the more local risk. Evergrande’s struggles, and the potential government bailout, may weaken an increasingly fragile Chinese economy. We fully recognize the threat to Chinese markets. This issue may linger for quite some time. As such, and this is jumping ahead just a little bit, we have reduced our emerging markets exposure from neutral to underweight.

What We are Watching – Does 2021 Follow 2013’s Track?

As I write this newsletter, I recognize that, on the policy front, this is a genuinely confusing time for markets. Yes, Washington D.C. is a total mess (my “Football Team” included), but there is so much for the markets to digest in a very rapid period. We could have clarity around tax rates, stimulus, debt ceiling, and Federal Reserve leadership in just three short weeks.

“History never repeats itself, but it does often rhyme”

Mark Twain

I find market history incredibly valuable when analyzing our current atmosphere. After all, as human beings, we react in similar ways in similar market environments.

One of my many mediocre, overused jokes is that good investing is 49% Market History, 49% Psychology, and 4% Mathematics (I’ll give you a second).

I find the comparison between 2013 and 2021 fascinating. It is remarkable how much the September/October time frame mimics our exact scenario. Our team built the below graphic to illustrate this concept -

When looking back at 2013, it is incredible to see so many similar headlines and market concerns. And yet, markets in ’13 were able to shake off a difficult period and finish the year remarkably strong – finishing up +30% for the year. Not to say that we forecast this furious rally to end in 2021, but it does serve as a healthy reminder that markets can move past policy unknowns rather quickly. Here is yet another great chart from Strategas showing the unusual similarity between market trajectories between the two years –

Source: Strategas

As a self-described market nerd, I find this truly amazing. Despite 2013’s strong year, markets experienced a 6% pullback in July and a 5% pullback in September/October – rattled by policy indecision and concerns around the Federal Reserve. Does that sound a little familiar? What is especially interesting is the furious rally in 2013 that followed this period of difficulty. Although our recent retreat has already gone a little deeper than ‘13’s, this should provide investors with some excellent perspective. As it relates to policy uncertainty – this too shall pass.

Chart of the Month – “Transitory” Inflation Stuck In-Transit:

Chart of the Month (Bonus) – A Reminder from Last Newsletter:

Allocation Update

Despite plenty of uncertainty in markets – policy changes, Delta variant, stickier inflation, Evergrande – we believe that these are short-term market dislocations that are being worked through. The next few weeks may remain bumpy, but it has not altered our long-term view.

Over the past couple of months, however, we have made some adjustments within client portfolios. In early August, we cut from Developed International and Emerging Markets, added to Real Estate, Large Cap US, and modestly increased our cash reserve (1% to 2%). We believe that US markets are the best house in the neighborhood and have added to our already overweight positioning. As it relates to Real Estate, we view this as an additional hedge against inflation risk. Specifically, we have added a short-term REIT component. Why short-term? These properties with short-term lease agreements (Storage, Apartments, Manufactured Homes) are better suited to combat rising costs and rising rates.

Through it all, we remain lukewarm bulls and maintain our modest overweight tilt to stocks. From our perspective, the data still points toward continued economic growth and improvement of economic fundamentals. Moreover, improved corporate earnings, largely a result of accommodative monetary policy, and steady re-opening suggest that markets have more working for it than against it once this trying period subsides. Also, our oft-used acronym TINA (there is no alternative) is alive and well. Fixed income markets struggle to provide meaningful returns. As such, the additional cash on the sidelines will ideally be utilized to position portfolios better heading into year-end. While our forecasts are subject to change, we will keep you informed and updated throughout the final months of ’21.

As the air gets crisper and the leaves start to change, our team at Highland Peak Wealth is beginning to turn our attention to end-of-year “to-do’s.” This is a fantastic time of year to organize end-of-year gifting, donations, tax planning, as well as satisfying those pesky required minimum distributions. So, if there is anything that is on your mind, please don’t hesitate to reach out. After all, best to avoid a bothersome task or DocuSign during the Holidays.

Speaking of leaves beginning to change, October is a BIG month in the McBurney household. Halloween is taken VERY seriously. October 1st is a day chock-full of decorating and the movie Hocus Pocus. It is Heather’s favorite holiday, and I’m not sure there is a close second. If it were up to her, those decorations would be up as early as Labor Day. Even more challenging, her unabridged enthusiasm has trickled down to Teddy. Not exactly the trickle-down economics I was hoping for. Each morning, Teddy asks, “Halloween today”? Poor kiddo. I usually must break it to him that, no, it is not Halloween today. And then, I proceed to fumble the concept of a “month away” to a toddler. Oh, and Teddy, he is going to be a chicken this year. Yes, a chicken – his favorite animal. My hope is to include some pictures in next month’s newsletter.

Have a wonderful October and start to Fall. For those driving around Milton, if you see a house with too many gravestones/skeletons, and an embarrassingly giant spider in the front, you may have found the McBurney abode.

As always, comments and questions are welcome.  

Kyle M. McBurney, CFP®

Managing Partner

The opinions expressed herein are those of Kyle McBurney, CFP as of the date of writing and are subject to change. This commentary is brought to you courtesy of Highland Peak Wealth which offers securities and investment advisory services through registered representatives of MML Investors Services, LLC (Member FINRA, Member SIPC). Past performance is not indicative of future performance. Information presented herein is meant for informational purposes only and should not be construed as specific tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary, therefore, the information should only be relied upon when coordinated with individual professional advice. This material may contain forward looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Referenced indexes, such as the S&P 500, are unmanaged and their performance reflects the reinvestment of dividends and interest. Individuals cannot invest directly in an index

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