Closing Out the Third Quarter
A couple weeks ago I wrote about how September is, on average, the worst month of the year for the stock market. Well, this September held true to character. For the month, the Dow Jones Industrial Average, S&P 500, and Nasdaq were down -4.29%, -4.76%, and -5.73% respectively. As for the quarter, it ended roughly where it began with returns basically flat for the period. There are a lot of reasons for the pullback this past month, many of which I have mentioned in these emails. Fortunately, a deal was reached on the debt ceiling yesterday, kicking the can down the road a couple more months and it appears progress is being made on the two big spending bills making their way through Congress, albeit both smaller than originally proposed. I remain optimistic that the fourth quarter will prove true to its character, and provide a positive return which it has done 80% of the time over the past thirty years. However, there remain serious headwinds which could throw the proverbial wrench into things. Expect volatility to stay with us a little longer.
Isn’t it strange how market moving news, i.e. China’s largest developer going bankrupt with over $300 billion in liabilities, can appear out of nowhere, move markets significantly, and disappear off the radar just days later? Despite the ongoing Evergrande debacle, this story has now been eclipsed by news of inflation, supply-chain collapse, employment and productivity issues, and not to be forgotten, COVID. Let’s talk briefly about the supply chain. I believe most, if not all analysts and economists had thought that by now supply chains would be back to normal. That is not the case. An estimated 500,000 containers are sitting on more than seventy cargo ships off the port of Los Angeles. Manufacturers in Malaysia, Vietnam, and Southeast Asia are experiencing rolling closures due to the pandemic, putting wafer and chip production months behind schedule and preventing auto manufacturers in North America from producing cars due to the lack of computer chips that go in them. There is a shortage of 60,000 truckers, which are necessary to haul materials and products from ports to distribution and production facilities. And did I mention that there remain over 10 million unfilled jobs in the United States notwithstanding approximately 8.5 million unemployed people. Things are clearly off-kilter and despite assurances from the Federal Reserve that inflation was going to be transitory, I don’t think anyone could have guessed just how constipated our economy could get.
One of the reasons I remain hopeful is that we are learning to live with COVID as a way of life much like we live with the flu and the common cold. One example is Merck, which announced today it has a new pill-form antiviral that has shown incredible efficacy in reducing hospitalizations and death in those who have contracted the virus. Much like Tamiflu is used for those suffering with the flu, this new medication would serve to reduce the symptoms and in almost all cases prevent the disease from becoming lethal. This is a huge development and one that should help alleviate some of our fears, and by extension some of the issues our economy faces. Merck was up 9% on the news.
However, there will be many companies reporting earnings in the coming weeks, and I expect a common theme this quarter will be higher raw material costs, higher labor costs, higher transportation costs, and shrinking margins. Bed Bath & Beyond announced earnings this week, missing estimates by a mile, lowering forward guidance, and suffering a 24% decline on the day. McCormick also announced earnings yesterday, and while doing considerably better than Bed Bath & Beyond, it too cited inflation as a major headwind. If not the epitome of this situation, Dollar Tree stores, which sells nearly everything for a dollar, plans on hiking prices to between $1.25 and $1.50 in response to rising costs. Companies can either reduce profit margins or raise prices. In the weeks ahead, I suspect we’re going to hear these themes repeated again and again.
In closing, I turn to a survey I came across this week that underscores just how deeply addicted we have become in the digital age. New research shows Americans check their phones 96 times a day. I did a little back-of-the-napkin math and using some assumptions on how many hours we’re awake, figured that amounts to once every ten minutes during waking hours. According to this survey, that is an increase of 20% in just the past two years. And as for the generational divide, those 18 to 24 years old check their phones twice as much as the national average or once every five minutes. I remember, not all that long ago, when cell phones didn’t exist, people had to communicate in person, and news happened once a day, usually in the evening. I don’t know if we’re better off nowadays, but it sure makes me wonder if this technology has increased our anxiety, reduced our patience and attention span, and helped us become more “disconnected” as a nation. Now you know.
Bruce J. Mason, MBA