September 2021 Investylitics

• A confluence of events has created volatility in the markets, and an approximate 5% pullback from recent all-time highs reached in early September.
• News of Evergrande, a Chinese real estate development and management company, having over $300 billion of debt and running short of cash, is sparking fears of an overseas version of an AIG/Lehman Brothers type event.
• Additionally, a number of issues on Capitol Hill, including the annual government funding process running up against the Federal debt ceiling and the traditional infrastructure/human infrastructure bills being negotiated in Congress, are creating a high level of anxiety in the near term.
• We also continue to deal with the Delta variant of COVID-19, uncertainty around vaccine mandates, and what this could mean to employers. This is adding to uncertainty around what course of action the Federal Reserve Bank will take at their meeting this week.
• We want to remind you that pullbacks of 5%-10% are common occurrences in the equity markets. They should not be viewed with fear or trepidation, no matter how the financial media portray them, and they could present good opportunities to allocate excess cash at lower prices.

Horizon Advisor Network’s Investment Committee met on the afternoon of Monday, September 20th.  We began by reviewing the asset allocation models of the portfolios managed by the committee.  We are happy to report that the model portfolios all continue to perform in line with their risk adjusted, index-based models over the most recent one, three, and five year periods of time.

A confluence of events has created a recent bout of volatility in the markets.  As a result, we have seen approximately a 5% pullback from recent all-time highs reached just earlier this month. It is interesting to note that while market capitalization based indexes have seen relatively minor, single digit pull backs, underneath the surface, the average stock within many of these indexes has pulled back much more, as market breadth has not been strong over the last several months.

Recent news out of China shows that Evergrande, a Chinese real estate development and management company, is running short of the cash needed to make payments on its nearly $300B of debt.  This is causing some concern that we could be moving towards an AIG/Lehman Brothers type event.  We know that the Chinese government will likely not want this to happen and will want to save face.   

Therefore, a number of scenarios could play out. The company could be restructured or bailed out.  In addition, the People's Bank of China could inject liquidity into the bond market and banking system to keep things flowing more normally. In reviewing this, it appears that this will likely be more of a localized event. It may turn out to be more similar to what we saw in the late 90’s, when the hedge fund Long-Term Capital failed and needed to be bailed. At the moment, we do not appear to be headed towards a 2008 type financial crisis event.  We will continue to monitor this situation carefully.

We are continuing to see the Delta variant of COVID wave play out.  As we have seen with past waves, case counts started much higher in the south.  Recent data shows that case counts in previous breakout states such as Texas, Florida, Georgia, and Louisiana are now declining, while the cases in northern states are rising.  All of this is taking place with the government considering various employer based vaccine mandates.  This could create further disruption in employment markets, where employers are already struggling to fill jobs.  This could lead to higher wages, as employers try to entice people back into the workplace, now that long-term unemployment benefits from the federal government have ended across the country.

On Capitol Hill, we have ongoing anxiety created by several issues. This includes the annual government funding process, the Treasury running up against the Federal debt ceiling, and negotiations around the traditional infrastructure and human infrastructure bills that are currently being negotiated.

In addition, the Federal Reserve Bank meets this week.  There was widespread expectation over the last several weeks that the Fed would announce that they would start tapering their bond purchases. They have been buying bonds since the spring of 2020, when the coronavirus shutdowns caused distress in the economy and the bond markets.  The Fed has been buying $120B a month of bonds, $80B a month of Treasury Bonds and $40B a month of mortgage bonds. 

These emergency measures have continued even as the economy has strongly rebounded, as evidenced by GDP growth and corporate profits. Accompanying this has been rising inflation pressures.  We once again saw the Producer Price Index hit an all-time high, on a year over year basis in its most recent report.  There is some question whether any or all of these issues will cause the Fed to kick the can down the road until their next meeting in November.

Against this backdrop, we want to remind you that pullbacks of 5%-10% are common occurrences in the equity markets, as you can see from the chart below.  While the financial media trumpet the events of the day as reasons to panic, you can see that 5% pullbacks have happened about three times per year over the last 78 years of market history.  To put this in further context, we have not seen a pullback of 5% since October of 2020 nearly 11 months ago.  We were clearly overdue.  These events tend to be healthy and flush out excess optimism and greed from the markets.

Additionally, the only way to get the compounded returns of the markets is to stay invested through the inevitable ups and downs we will inevitably experience.  This is what separates successful investors from those who panic and miss the long term compounding and growth of their portfolios over time. Both your advisor and the committee are here to walk with you on that journey. Thank you for your continued trust. Have a great day.