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Lifestyle

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Investments

The fourth quarter of 2021 has reintroduced market fluctuations that are more common in the equity markets. We are now in our second of two 5% pullbacks from market highs. The first initiated by the risk of Chinese real estate company Evergrande defaulting, and the second now resulting from a one-two punch of the Omicron variant and Fed taper talk. It is helpful to remember that on average there are three of these types of pullbacks per year and they last 40 days from start to finish.

In the October newsletter, we mentioned holding elevated cash reserves, and while we didn’t get the 10% correction we thought possible, we have used these market drawdowns to add to positions to play the market rebounding to previous highs. On the margin, we’ve added to technology, health care, and core equity positions in large and small U.S. companies. Though many investments are below their highs for the year, we anticipate the market will soon remember how strong corporate earnings are and the accommodative measures our government continues offer to create more growth. Just like Evergrande worries quickly became a faint memory, so too will the current set of concerns.

**Note: This time of year, asset management companies distribute capital gains to investors. On days this happens, the share price decreases before the equivalent amount of cash or shares is added to the customers account about a week later. Watching daily performance relative to the market may look odd because of these prices changes. This happens every December and will resolve itself by the end of the month.

Food

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Economy

Holiday Resilience

Predicting the impact of the new variant is difficult, if not impossible, at this point. But there are logical reasons to expect limited economic impact, such as high vaccination rates, advances in treatments to reduce instances of severe disease, and various containment measures to limit spread (masks, distancing, etc.). Lockdowns are extremely unpopular, so we’re probably not headed there again, but we have a playbook that we can be reasonably confident will work.

However, key questions remain unanswered. Will existing vaccines be less effective against Omicron? Will symptoms be more severe than prior variants? Is this latest variant more transmissible than prior variants? So, while we think the drag on the economy will be modest, we simply won’t know for sure until we get more data over the next couple of weeks. Markets don’t like uncertainty, but we’ll have an extra helping of it on our plates along with Thanksgiving leftovers for a little bit.

Omicron does not change the fact that the U.S. economy is showing some strong momentum. A solid 1.7% increase in retail sales in October and a good start to the holiday shopping season point to strong consumer spending in the fourth quarter. The National Retail Federation sees holiday sales potentially increasing by 10% this year compared with 2020. Meanwhile, new filings for jobless claims for the week ending November 19 fell to a 50-year low, an impressive number even considering distortions from seasonal adjustments.

Businesses are doing their part to support financial markets in a tough operating environment. Profits from S&P 500 Index companies rose nearly 40% year over year in the third quarter and are expected to rise another 20% in the fourth quarter (source: FactSet) despite persistent supply chain disruptions, shortages of labor and materials, and related cost pressures. Net profit margins for S&P 500 companies in the third quarter remained near record-high second quarter levels, a remarkable feat given the circumstances. Finally, manufacturing surveys point to solid demand while offering signs that supply chain disruptions, and possibly inflation pressures, may be at or near a peak.

The path back to normal has been bumpier than anticipated, but we’ll get there.

Here’s hoping you have a wonderful and healthy holiday season. Please contact me if you have any questions.

Sincerely,

David Laut
CEO, Certified Financial Planner™
O / 916-846-7780
A / 4180 Douglas Blvd. Suite 200, Granite Bay, CA 95746
DavidL@liveabound.com
www.liveabound.com

Important Information

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.

All data is provided as of December 1, 2021.

Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services. LPL Financial doesn’t provide research on individual equities.
All index data from FactSet.

This Research material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.