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The surge of a new COVID variant, a global supply chain struggling to keep up with demand, inflation on the rise, a major debt crisis in China, and the looming threat of another government shutdown here in the US made the third quarter anything but ordinary. Despite all this uncertainty, the US equity markets did their best to hang in there. For the quarter, the S&P500 was essentially flat with a -0.29% return and the Dow Jones was down -2.28%.

Global supply chain update: Still broken. The queue of container ships waiting to enter neighboring ports of Los Angeles and Long Beach hit an all-time high of 65 vessels in the past couple weeks, and they’ll wait an average of 8.7 days to deliver their cargo. The average transit time from China to the US is now 71 days, compared to 40 days in 2019. This matters because these California ports are the busiest in the US, and they accept more than a quarter of all American imports. Nike and Costco are two victims of these supply chain issues who have recently cut their revenue forecasts for the year. Nike also said that 80% of its shoe factories in Vietnam are currently closed. Be prepared to hear this more and more during the upcoming earnings season. Of all the goods caught up in these bottlenecks, semiconductors and other chips used in electronics may be the most in demand. The global chip shortage will cost the auto industry $210 billion in revenue, according to consulting firm AlixPartners. Automakers are estimated to lose 7.7 million units of production this year because of the chip shortage.

As a result of these bottlenecks and the Federal Reserve’s purchase program of $120 billion of bonds every month, inflation has kicked in and is on the rise. In fact, Dollar Tree (a store that sells a majority of their items for only one dollar) announced that they will be boosting their prices above $1 as their costs continue to rise. To avoid being accused of false advertising, they may soon have to change their name to the “Dollar Tree Plus.” As of August, the U.S. Consumer Price Index, the most widely used measure of inflation, read a 5.3% increase in prices compared to August of 2020. While the Federal Reserve has signaled that they believe this inflation is only “transitory,” these lingering bottlenecks threaten to limit supply and keep inflation elevated. The economic experts at Strategas suggest inflation will likely not be sticky at 5%, but it remains an open question as to whether price changes will remain closer to 3% in years to come. The Federal Reserve has given us more transparency about when they will begin slowing down their bond purchases and, in response, treasury yields are back on the rise. Rising yields don’t necessarily spell doom for stocks. They actually appear to be signaling that a more “normal” economy, one that doesn’t require unprecedented government stimulus, is arriving.

In China, a company called Evergrande promised to deliver apartments to some 1.5 million buyers, who are still waiting for their keys. Some of them have started protesting. They want Evergrande (oxymoron?), the world’s most indebted property developer, to resume construction of the apartments they were promised, or give back their money. On September 23rd, Evergrande seemed to have missed their deadline on interest payments of $83.5 million to offshore bondholders, according to sources quoted in several media reports. The group is now entering a 30-day grace period during which it can still make good with its creditors, but fears have increased about the company’s capacity to manage its $305 billion total debt load. It remains to be seen if and how Chinese authorities will react- whether they will allow Evergrande to collapse, facilitate a restructuring, or bail out the battered group. If that wasn’t already enough Chinese drama for you, President Xi has also been cracking down on industries as he tries to center the country around the ideal of “common prosperity.” During the last three months he has 1) stopped Didi, the Uber of China, from signing up new customers 2) announced plans to break up Alipay, China’s largest digital payments platform 3) expanded a ban on crypto-related transactions 4) limited the amount of time young children can play videogames 5) banned “effeminate” men from appearing on TV and 6) blocked tutoring companies from taking profits.

Although, the media loves to bombard us with negative news, it’s important to remember that there are still positive events happening in the world. The oldest living World War II veteran, Lawrence Brooks, just celebrated his 112th birthday in September. Commercial space flight is officially a reality. In July, Richard Branson and Jeff Bezos separately blasted off into space in their own respective rockets before safely landing back down to Earth. The percent of people in the U.S. who have received at least one dose of a Covid-19 vaccine is now over 65%. Drugmaker Merck just released a study that its antiviral pill, molnupiravir, slashed the risk of hospitalization or death in subjects with mild to moderate Covid-19 by 50%. If approved by the FDA, this treatment could be a huge help to keep hospitals from being overwhelmed. After growing at an annual rate of +6.7% in the second quarter of 2021, forecasters from the Federal Reserve of Philadelphia expect U.S. GDP to grow 6.1% in 2021 and 4.4% in 2022. The net worth of U.S. households rose to a record $141.7 trillion as of June 30th, up 19.6% from a year ago. Of the $5.85 trillion increase in net worth, stocks accounted for $3.5 trillion, and real estate appreciation was responsible for $1.2 trillion. Personal savings in the US is also up more than $700 billion compared to the 10-year average before the pandemic, per Strategas.

With all that’s going on in the world, the fourth quarter promises to be another volatile one. Though volatility may create short term worries, it also typically creates long-term buying opportunities. We will stay tuned.

Mackenzie C. Edwards                                                      September 30, 2021

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