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September Slow as Usual





September has historically been a tough month for the markets and this year was no different.


Covid-19 delta variant fears continue to be a wildcard. Inflation concerns (are we approaching the point where price increases are more than “transitory?”) and Fed policy worries are still culprits. Political infighting and gamesmanship were front-and-center as the month closed. Also a mixed bag of economic data added to the fun in September as well.


There were more positive reports than negative for the reporting period. (The two items to follow, oil and interest rates, can be interpreted as both good and bad news.) Retail sales, new homes, durable goods, manufacturing, and services came in better than expected. Exiting homes (still plagued by low inventory) and consumer confidence were disappointing.


Crude prices have increased for six quarters in a row as traders make bets on continuing higher demand and measured production. This is a positive reflection on the economic outlook.


There are a couple of oddities going on in this space. In China, demand for winter heating alternative is elevated due to a coal shortage and widespread blackouts. Natural Gas is currently in short supply in China as well.


Opportunities for US producers are developing with the increase in Chinese demand.


There is another oil story coming out of the United Kingdom… they’re running out of gas. This is a result of panic buying in response to another supply chain crisis.


This time, there is no shortage of fuel. There is a shortage of truck drivers to make deliveries. As we mentioned earlier, higher oil prices can be good and bad. While they often indicate a strengthening economic picture, they also contribute to higher inflation. Fed Chair Jerome Powell admits that inflation is currently “frustrating” and likely to remain into 2022.


Now to interest rates. Normally a rise in interest rates like we have seen in the waning days of the Third Quarter would indicate improving prospects for the economy. And while most investors, indeed, are optimistic of the economy, their outlook hasn’t changed much lately. This rise in rates is rather more likely a correction of an overbought bond market.


There are lots of question and lots of volatility around right now. This is what we expected for the months of September. But the economy is fundamentally still in good shape. We have a Fed that is acting in a slow, deliberate manner. Absent an unexpected major Covid twist, stock prices still have room to climb and have done so far in October.