The Summer that began with so much optimism is coming to an end. While Wall Street is still clinging to optimism, its grip may be severely tested this Fall. A host of issues have emerged that could impact all the financial markets just as we head into a season already known for market turmoil. Are you prepared?
I’m sure you’re already well aware of the issues I’m referring to. One, of course, is Covid-19. The reason Summer started with so much optimism is that coronavirus infection rates were falling, and the U.S. economy was fully reopening. However, as Summer wore on, new Covid-19 variants emerged, and infection rates began climbing again. The trend has only gotten worse, and in some areas of the U.S., hospitalization and infection numbers are now higher than they’ve been at any time during the pandemic.*
The situation is even more troubling when you consider that one variant—the lambda variant—may be vaccine-resistant and more deadly than the original virus.** If it becomes more widespread, could it lead to a de facto economic shutdown in which people are simply afraid to go out? It’s a troubling question as we head into Fall, when fewer businesses will be able to offer outdoor service options in many parts of the country.
New Terrorist Fears
On top of that, we could see another threat worsen to the point where many Americans are afraid to go out: terrorism. Though it’s heartbreaking to think about, the fact is that as the 20th anniversary of 9/11 approaches, the Taliban has reemerged as a threat to national security. We’ve already seen one terrorist attack kill American soldiers in Afghanistan. Will the situation worsen, and if so, will it shake up the markets as this issue usually does?
In addition to all this, we also have the delicate state of the economic recovery itself. So far this year, that has been the only issue to cause any real stock market volatility—specifically the threats of inflation and rising interest rates. However, even that volatility was fleeting, and ultimately all three major market indexes have hit numerous new record highs this year. Will that trend continue, or will the Federal Reserve undo it by mistiming its next big move? If the Fed raises short-term rates or unwinds quantitative easing too early, that could send us back into a recession. If it waits too long, inflation could worsen. Either scenario could send the markets reeling—and it wouldn’t be the first time that poor timing by the Fed triggered a correction.
No one knows for sure what will happen, but there are some important points to keep in mind. One is that for all the stubborn optimism of the stock market, as I pointed out in last month’s newsletter, the bond market tells a different story. After rising steadily early this year, the yield on the 10-Year Treasury rate leveled off this spring and has trended mostly downward ever since.*** This suggests an increasingly high demand for bonds and the security they provide relative to stocks. In other words, the bond market has appeared much less optimistic than the stock market for most of the year, and it remains that way as we head into Fall.
The October Effect
Another important point is that, historically, fall is often seen as a challenging time for the financial markets. This perception is based largely on the October Effect, which is the idea that financial declines and market crashes occur in the 10th month of the year more than any other. The panic of 1907, the great crash of 1929, and 1987’s Black Monday all happened in October. Even though Wall Street has enjoyed plenty of strong Octobers, the October Effect can still have an impact because the markets are so emotional. In other words, just the fear of an impending market drop can be what causes the drop.
This year it seems fitting that October is also the month of Halloween, and that one of the iconic symbols of Halloween is the skeleton. Between Covid-19, Afghanistan, inflation, and several other factors, we now have quite a few “skeletons” in the world’s geopolitical closet, any one of which could suddenly fall out and shake up the financial markets in a major way. So, it’s important to be able to answer that question I asked in the first paragraph: are you prepared?
If you’re not sure, here’s the good news about Summer ending and Fall beginning: it’s back-to school season. It’s time to study and get serious again, and that means getting serious about your finances—especially if you’ve taken a break from thinking about them all Summer. That hasn’t cost you anything because the markets have cooperated, but that situation could change quickly in the months ahead, and—as we’ve seen—there are plenty of catalysts to trigger that change. With that in mind, are you still comfortable with your allocation? Has your risk tolerance changed based on what’s happening in the markets, the world, or with changes in your own life or to your goals?
These are just a few important questions to make sure you can answer as back-to-school season begins. If you’re not sure of the answers, call our office to schedule a portfolio review. The sooner the better, because the last thing you want is to get caught flat-footed if one of these skeletons should tumble out of the closet and send the markets tumbling with it!
*“In Florida, the Pandemic is Worse Now Than it Has Ever Been Before,” New York Times, Aug. 26, 2021
**“It’s Time to Pay Close Attention to the Lambda Variant Now Devastating South America,” Forbes. Aug. 10, 2021
***YCharts.com
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