By: Stash Graham
October brought new life after a poor September for financial assets. All three of the major domestic indices produced positive returns, making up for losses in September. Since September 1st, the Dow Jones Industrial Average and Nasdaq had +1.1% and +0.7% returns, respectively. The S&P 500 was the slight winner producing +1.2% since September 1st. The rebounds were consistent with our portfolios which realized strong returns. Our broad commodities-based tracker position (Ticker: PDBC) made over +9% for the 60 days, while our gold position (Ticker: IAU) lost -2%. We continue to monitor these real assets closely as we are entering a typically weak commodity period. We are delighted with the performance of the accounts this month. We were able to produce good returns while also reducing risk in the portfolio. Dysfunction in Washington, D.C., has been mentioned as a cause of concern in conservations with your fellow partners over the last couple of months. We recognize that the risk is real, and divisions in government could see the government shutdown in early December. However, market participants are discounting this chance.
The end of October brought us interesting developments from both financial markets and the domestic economy. First, the United States economy slowed down materially during the third quarter. The preliminary measure of the domestic economy said the Gross Domestic Product (GDP) grew by +2.0% (consensus estimates were +2.6%). We are concerned that the initial measure will prove to be optimistic as the Federal Reserve Bank of Atlanta’s GDPNow metric, as of October 27th, stated that the U.S. economy grew by +0.2%. Remember, just 90 days ago, Wall Street and the Atlanta Fed assumed +6.0% GDP growth for the third quarter. Positive contributors to the GDP print came from state and local government spending and inventory accumulation by businesses. Detracting from the GDP figures was a contraction in real final sales (-0.1%) and weak auto sales figures (impacted by the supply constraints). We remain concerned that if the government does shut down in early December, the economy will not have the support needed to hit fourth-quarter GDP growth estimates of +6%. We feel this estimate from Wall Street is too optimistic and will prove to be wrong.
In financial markets, we started to see some companies struggle to meet top line (revenue) estimates due to supply issues (preventing products from getting made) or transport constraints (preventing products from getting on shelves). In addition, companies struggling with bottom line (earnings) estimates have to navigate higher labor wages and/or raw material prices that show no signs of decreasing (especially wages). Amazon was a great example of the difficult environment companies currently face. Amazon missed on third-quarter earnings estimates badly due to unexpected inflationary pressures from wage (~$1 billion expense increase) and steel costs (just under ~$1 billion expense increase). Looking forward, the company provided fourth-quarter revenue estimates that were below expectations due to some customers refusing to pay higher prices. Additionally, the company has less inventory to offer to prospective customers as supply chain issues persist.
As the economy navigates persistent supply chain issues, financial markets benefit from a supportive Federal Reserve. The November FOMC meeting could be the inflection point in monetary policy when the Federal Reserve starts its change of course on monetary policy support. While it is unlikely (we believe Fed Chair Powell would like to be renominated), the difference in monetary policy requires close attention as “money creation” has been and continues to be the primary driver of positive returns in financial markets.
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