What drove returns in the first half of the year continued into Q3, at least until September. Progress in reopening the domestic economy continued in July and August, albeit at a slower pace, and seemingly moved quickly from infancy (or youthful exuberance) earlier in the year to adolescence and potentially its teenage life-stage as we begin Q4.
The COVID-19 Delta variant played a role as uncertainty abounded and anxiety about a potential return to quarantine and lockdown gave markets reason to pause. Perhaps exerting more influence over markets however were readings of inflation, month-over-month the likes of which we haven’t seen in the US since pre-financial crisis in 2007-08. As a result, we are keeping a close eye on the actions of the Federal Reserve (Fed). And while we stand by what we outlined in last quarter’s newsletter it appears as though tapering will in indeed begin prior to year-end 2021. This, in our opinion is/was the main driver of market volatility in September and into October. When and to what extent interest rate hikes to combat inflation come into play remains to be seen but the consensus remains no earlier than 2023.
‘Turning to inflation, and equally as important central banks’ response to potential inflationary fears in the future, we feel spikes in Q2 were temporary and that a reversion to the Fed’s target rate of inflation is the most likely outcome. Wage growth, stimulus and a choked supply chain were seemingly the culprit in April and May and should normalize as reopening progresses and economies normalize.’
Overall as we are seeing meaningful drops in the number of Delta cases, hospitalizations, and deaths. If indeed tapering by the Federal Reserve begins to bring inflation in-line and closer to its target of 2%, we see no reason why equities would fall out of favor and the reopening trade will not again gain strength.
The Tactical Allocation Portfolio (TAP) witnessed several risk-management trades in September as volatility stepped in. Effectively reducing risk while searching for new opportunities. Only one of which has presented itself recently leaving an above average allocation to cash and cash equivalents to begin Q4. A very comfortable position to be in as big swings in either direction have become the norm as of late.
There were no changes to the fixed-income sleeve within TAP as we remained committed to the intermediate portion of the yield curve.
As pleased as we were with the results in Q2 we remained focused, let positions run and only towards the end of Q3 were we forced to implement changes. Our strategy and models are based on a very strict set rules which dictate our decision-making process. We are hopeful what we have outlined above in terms of reopening and its impact on future growth reinvigorates the current trend but remain prepared should an unforeseen event change this market’s course.
Fraser, Dudley, Alex, Josh, Christie & Melanie