An Enormous Amount of Stuff

In late September into early October, the markets sold off 5% from the early September all-time high, walked up to the abyss and peered over the edge. A confluence of macro forces were pushing investors from behind—$6 trillion of deficits over the last two years, historically low interest rates out of step with persistent inflation over 5% for the past half year, active legislation for another $1-$3 trillion in social programs to be paid with new tax increases, stock valuations in bubble territory pushed up with stimulus money, and a fight over the debt ceiling that threatened a Treasury default and a government shutdown. 

And then Congress kicked the debt-ceiling can into December, bonds started to sell off and rates started to rise—even as the Fed continues buying bonds injecting $120 billion a month of stimulus into the banking system—and the first corporate earnings reports for third quarter started to come in. Strong. Banks, consumer companies, energy, all beat estimates.

As the month moved into the heart of earnings seasons, the beats kept on. Pharma, manufacturing, shippers, and big tech all posted sizable gains beating earnings estimates. Hertz ordered 100,000 Teslas. Eighty percent of the 150 S&P 500 that have reported beat estimates. When it’s over, S&P 500 companies are expected to have grown profits by almost 36% in the third quarter.

What moves the market? Earnings. What happened to inflation? Companies raised prices and turned in great sales and earnings numbers. The Fed is still injecting new capital into the system, consumers are buying out the stock of everything from sports cars to kitchen tile cleaner, and shippers are backed up trying to deliver a glut of stuff. We may need to call out the National Guard to deliver everything.

When the pandemic kept us from going out and consuming the experiences that normally fill our days, we went online and started buying stuff. A tsunami of stuff, Slate called it. A tsunami that has swamped suppliers and shippers, more stuff than we’ve ever imported before.

So here we are at another campsite on the edge of the cliff with the market once again at all-time highs. Inflation fears are being held in check, at the moment, by corporate earnings pumped up by inflated prices and pent up demand. Continuing Fed stimulus keeps the cost of money low and the bear of inflation away from the earnings campfire. 

The Fed may begin cutting back on new wood for the fire as early as this coming month. Earnings may begin to suffer from higher cost money, consumer price resistance, and inflation may push back as it does when the Fed tightens. And by then it will be December and we’ll be back looking over the edge of the cliff again. 

Our retirement planning method is to stay a safe distance from the edge. We do this by investing your allocation to lifestyle expenses in risk-free assets, typically Treasury bonds, but currently, that includes an overweight of cash equivalents forced by the Fed’s zero-rate regimen. 

With your lifestyle covered, we can then invest the balance in risky assets—stocks—for long-term growth and legacy. While we wish we could do better than overweight cash in your lifestyle allocation, in some ways that is the price for the extraordinary growth (and volatility) of risky equities over the last several years. Cash may keep us from sky-high returns, which are no longer our top goal in retirement in any event, but it also keeps us from falling off the cliff.