October 1, 2021 Commentary

Stocks, as measured by the Dow Jones Industrial Average, have declined 4.4% since the peak on August 13, 2021. According to a study by Capital Group, from 1949 to 2020, stocks decline -5% approximately three times per year. The average length of decline from peak to low is 43 days. The peak before the current decline was August 13,2021, 49 days ago. We could, therefore, be on the lookout for an upward trend, unless, of course, the disrupted reopening, contemplations around debt, spending and inflation continue to weigh heavily on the market. Importantly, this history also shows that stock market declines are a normal occurrence and do, over time, reverse.

The decline trend starting in August clearly reflects the ratchetting downward of earnings and GDP forecasts that began as the Delta Variant of Covid-19 caused increases in illness and hospitalizations. Prior to this, as vaccines became available and usage increased, an expectation of a pandemic end crept into reopening expectations and analyst forecasts for the timing of GDP growth such as the forecast below.

 The S&P Earnings Expectations chart, provided by Fidelity Investments, highlights perhaps the exuberance of reopening. What next?

Stocks normally trade on expectations of earnings. For example, the DJIA increased 32% from September 1, 2019 to August 1, 2021 very much in line with forecasts.

We continue to believe that reopening will resume, albeit at a slower pace than previously forecast. We also believe that pent-up demand and stimulus will fuel growth at higher levels than we have seen since 2009. However, it may be that those gains will occur in 2022, making for another year of double digit returns in stock prices.

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