Friday The 13th Comes and Goes

With Friday the 13th just having come and gone, now seems an appropriate time to take stock of those issues that worry many investors. First, there is the Delta variant of COVID-19, and the worry it will lead to the US economy being locked down. Next, there is inflation, and the concern the recent spike in prices proves persistent and forces the Fed to raise rates sooner than expected. Then, there is the possibility of meaningfully higher tax rates on corporate profits, income, and capital gains and what that might mean for corporate and consumer sentiment and spending. And, there is the regulatory crackdown in China and what that might mean for emerging markets. Finally, there is valuation, with the S&P 500 trading north of 20x earnings and what that might mean for future returns.

While not wanting to be dismissive of any of those concerns, particularly the Delta variant and its potential impact from a health perspective, there are always reasons to worry about the market (last week we wrote about adages, and a classic is “The market climbs a wall of worry”). At the risk of coming across as a glass half full type of investor (though we are an optimist at heart), we don’t expect broad economic lockdowns due to the Delta variant; we don’t see the Fed raising rates before 2023; we don’t see tax rates moving to where the Biden Administration has proposed; we don’t see the crackdown in China casting a pall over all emerging markets, and we don’t see elevated valuation as a meaningful headwind for US equities (as long as earnings continue to grow year-over-year and rates remain low).

With that said, volatility and pullbacks are part and parcel of investing; in fact, over the past 20 years the S&P 500 has pulled back on average nearly 17% intra-year, yet still produced an average annual return of nearly 7%. Over time, the economy and corporate profits grow, and risk assets increase in value.