📝 Market Commentary for 2021-Q3
This quarter, we look at the exuberance in U.S. stocks, decelerating economic conditions, and China's wide-scale regulatory crackdown on its private sector.
We conduct extensive investment research and comment on the most significant market events in the past quarter.
Do not reply to this email with any service requests, contact us for support if needed.
U.S. Financial Markets Exhibit Bubble-Like Exuberance.
(Conscious Capital Advisors)
Source: Various
As stock markets continue to rally to new highs and asset valuations stretch to uncomfortable levels, retail investor sentiment is turning greedy. It is a disserve as a financial professional not to warn our readers about what may be the most significant market bubbles that I have seen in my career. We've covered the origins of this bubble almost every quarter, as it has been an essential factor in the performance of financial markets since 2008. However, for those who don't know, here it is again.
To combat the Global Financial Crisis of 2008, the Fed introduced extensive amounts of quantitative easing ("QE"), which is the direct injection of new money into the general money supply. Before this change in strategy, the Fed's main tactic was to manipulate short-term interest rates, which had no direct impact on long-duration assets. But, with QE, the Fed could now influence long-term interest rates by purchasing long-dated bonds. Using QE, the Fed drove 10-year Treasury yields from 4.10% to 1.44% in the years following the Global Financial Crisis from 2008 to 2012. The Fed used QE again in 2020 to combat the COVID-19 pandemic, purchasing $120 billion in government-backed bonds every month and driving 10-year rates from 1.25% to 0.55%.
A year and a half after the start of the pandemic, Fed Chair Jerome H. Powell has given the most unambiguous signal that the central bank will reduce bond purchases or "taper" QE as economic circumstances improve. Many fear that even the slightest change in the very accommodative Fed policy may generate economic and financial turmoil in other assets. If the Fed decides to retreat, considerable market volatility is very possible given current valuations.
Global Economic Indicators Lag as Inflation Concerns Increase.
(Conscious Capital Advisors)
Source: Reuters
This Fed policy change may come at a time when global and domestic economic indicators are flagging. Primarily driven by supply chain challenges and decreased consumer spending, U.S. GDP growth slowed to 2% in Q3 2021, a well below expectations. Lower private investment into residential real estate, less government spending, and an increase in the U.S. trade deficit also factored into the slower growth.
The slowing economic growth puts the Fed in a quandary, as U.S. inflation metrics reach 13-year highs. Core PCE, which excludes food and energy, rose 4.5%, slowing from the second quarter's 6.1% increase but still well above the pre-Covid pace. Combined with the current labor situation, the U.S. risks a wage-price spiral, as workers demand raises because of the rising costs of living, which in turn causes companies to raise prices. It often leads to high inflation, which may require the Fed to reverse its inflationary monetary policy.
Chinese Government Crackdowns Harm Chinese Equities.
(Conscious Capital Advisors)
Source: Reuters
YTD performance as of 9/15/2021
Over the summer, the Chinese Communist Party unleashed a massive regulatory crackdown. In the run-up to Xi's contested third term in 2022, the vast "rectification" campaign aims to redefine China's business and societal landscape. From cryptocurrency to online education to real estate, Beijing's reforms have wiped hundreds of billions off some major Chinese companies' market cap and are raising investor concerns about what may be next. Some fear that the scope and speed of the society-wide correction signal the start of a cultural and ideological revolution that could make the country hospitable to foreign investment. By the end of the third quarter of 2021, the MSCI China Index had underperformed the MSCI ACWI Index by over 28% year-to-date.
Many had hoped that Joe Biden's election as U.S. president would create a reset for Sino-American relations. However, Trump-era tariffs on the world's second-largest economy remain in place, and the sensitive geopolitical situation regarding Taiwan appears to be worsening. In October alone, Beijing has sent over 150 warplanes into Taiwan's Air Defense Identification Zone, breaking records for such an incursion. As China's economy currently suffers from a stagflationary combo of rising energy prices and slowing industrial activity, the situation could evolve to a "black-swan" geopolitical event that could have global ramifications. We are watching closely as this situation develops.
Written by Joseph Lu, CFA®
Joseph has over a decade of experience as an investment professional, primarily in quantitative analysis and portfolio management roles. He is the founder and managing director of Conscious Capital Advisors and a CFA® Charterholder. The CFA charter is a globally respected, graduate-level investment credential by the CFA Institute, a global association of more than 90,000 investment professionals working in over 133 countries.
🔗 Connect with us on LinkedIn, Facebook, or Twitter.
Have a question about what we shared? Email us at info@consciouscapital.pro.
Do not reply to this email with any service requests, contact us for support if needed.
The information presented in this newsletter is for educational purposes only and is not a solicitation or recommendation for any specific security, product, service, or investment strategy.
Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with a qualified financial advisor, tax professional, or attorney before implementing any strategy or recommendation you may read here.