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Will there be a Santa Rally in 2021? Do you remember December of 2018, the worst December since the Great Depression, when the S&P500 dropped -14% in the last quarter of the year (with -9.2% losses in December)? Will dysfunction in the Beltway spoil the party on Wall Street?
The Debt Ceiling Crisis
On September 30, 2021, Congress passed a bill to fund the government through December 3, 2021. At that point they’ll either have to pass a full budget for the fiscal year of 2022 or punt the ball again. The good news is that it was in time to avert a government shutdown. However, the Debt Ceiling crisis is still looming.
Although Congress technically has until October 18, 2021, before the Treasury Department runs out of money to pay their bills, the debt ceiling suspension should have already happened. There are many reasons for that. With Republicans blocking votes to raise the Debt Ceiling, the pathway to success is tricky. Additionally, brinkmanship can roil the markets. Wall Street has become inured to the Beltway circus. However, the closer the U.S. gets to the default date without a solution, the less patient investors will be. There is also the issue of the U.S. AAA credit rating with Moody’s and Fitch Ratings.
On August 2nd of 2011 the Debt Ceiling was suspended on the exact day when the U.S. would have defaulted. There wasn’t any delay in payments. However, S&P Global Ratings downgraded the U.S. to AA+ rating. Fitch Ratings currently has the U.S. AAA rating on a negative outlook. Moody’s chief economist Mark Zandi warned on September 21, 2021, that failure to lift or suspend the Debt Ceiling could result in 6 million jobs lost, a stock market meltdown, $15 trillion of household wealth evanescing and unemployment skyrocketing to 9%.
5.9% GDP growth is the best we’ve seen in decades — since 7.2% GDP growth in 1984. That would normally signal a strong Santa Rally.
Stock market performance can be highly correlated with GDP performance. Since 2008, it has been more highly correlated with Federal Reserve policy, which is why the phrase “Don’t fight the Fed” has become a Wall Street commandment.
3Q 2021 Slowed Down
Third quarter 2021 GDP growth estimates will be released on October 28, 2021, at 8:30 AM eastern time. The second quarter grew at a rate of 6.7%. The first quarter came in 6.3% higher. 3Q2021 is predicted to slow down due to the Delta Variant and supply chain bottlenecks. Forecasters have pegged the rate at somewhere Between 3.2 and 3.8% GDP growth. That’s still respectable, particularly in a pandemic. However, it’s clearly far below the first and second quarters. That could spook some investors, particularly since stocks are very pricey.
Stocks are High
Stock valuations are very high. As an example, Amazon is worth $1.7 trillion, but has only $21.33 billion in annual net income. The company’s forward price-earnings ratio is 64. The historical average price-earnings ratio is 17 (according to S&P Global Indices). According to Federal Reserve data, forward PEs are so high that they are back to the very speculative status that occurred before the Dot Com Recession. As a reminder, that recession cost the NASDAQ Composite Index 78% of its value between March 2000 and October 2002. In the CAPE Ratio chart below (source: Professor Robert Shiller), the Great Depression has now fallen to the 3rd most highly speculative time in the last century, behind today, with the Dot Com Recession still claiming the top seat.
In the words of the Federal Reserve Financial Stability Report issued on May 6, 2021, “Should risk appetite decline from elevated levels, a broad range of asset prices could be vulnerable to large and sudden declines, which can lead to broader stress to the financial system.”
Very High Margin Trading
Margin trading is also elevated. Many traders are borrowing to invest. That will spell trouble if the markets decline, and could speed up the pace of the rout. Brokerages have policies to liquidate holdings and cover their own loans, even without their client’s permission.
What About Real Estate
Real estate prices are also elevated. Mortgage rates are rising. The good news is that many homeowners have historically low fixed rates locked in. The bad news is that up to two-thirds of new Millennial home buyers are regretting their purchase.
Even with the S&P500 down almost 5% in September, the market index is still up 16.4% on the year. That’s an excellent return. So, will the Santa Rally make investors even happier than they already are on the year? If the debt ceiling is raised or suspended within the next few days, if Fitch Ratings and Moody’s Analytics reaffirm the AAA credit rating of the US, if the pandemic abates, if corporations continue their robust stock buyback plans, if consumers keep spending and if investors remain optimistic, stocks should go up.
There are a lot of ifs in that sentence. A Debt Ceiling debacle or a credit downgrade could easily spark a crash in the markets.
That is why your best strategy right now would be to fix the roof while the sun is still shining. Know what you own. Make sure that you are safe, protected, hot and diversified, and that you know what is safe in a world where bonds and money market funds are vulnerable. Jumping all in or all out of the stock market doesn’t work. (Don’t fight the Fed.) However, being properly diversified and rebalancing regularly is a buy low, sell high plan on autopilot, particularly if you are using our nest egg pie chart system.
If you’re interested in protecting your wealth now, consider joining us for our October 23-25, 2021 Investor Educational Retreat. You can also request information about receiving an unbiased second opinion of your current wealth, investing and retirement strategy. Email email@example.com with “Retreat” or “2nd Opinion” in the subject line.
If you'd like to learn how to learn how to invest in great companies, how to protect your wealth and how to manage volatile industries, like gold, cannabis and crypto, then join me for our 3-day Investor Educational Retreat. Our Company of the Year has tripled in just four months. We've had many Shoot the Moon stock picks in 2020 and 2021. You will also learn how to earn money while you sleep with a time-proven, 21st Century plan. Wisdom is the cure. It's time to become the boss of your money. Call 310-430-2397 or email info@NataliePace.com to learn more now.
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Cannabis and the Road to Decriminalization in the U.S.
Hot ETFs Return Up to 50% Since October.
Investor IQ Test 2021.
Investor IQ Test Answers
Shoot the Moon Stock Picks
2021 Crystal Ball.
Would You Pay $50 for a Cafe Latte? Is Your Tesla Stock Overpriced?
Can Medmen Avoid Bankruptcy?
Bitcoin is Back, Baby!
Real Estate Prices are Going Up. And Down.
Cannabis is Decriminalized. Stocks Triple.
Thanksgiving in a Pandemic. The Sustainability Silver Lining.
Money Stress Killed My Friend
Real Estate and Housing 2021. Challenges & Opportunities
Real Estate in a Pandemic. Interview with Mike Fratantoni, the Chief Economist of the Mortgage Bankers Association.
Bonds are Illiquid & Negative-Yielding.
Annual Rebalancing is a Buy Low, Sell High Plan on Auto-Pilot.
Is Your Bank a Junk Bond
Put Your Money Where Your Heart Is.
Schwab's Chief Fixed Income Strategist on What's Safe.
China's Tesla (Nio). 2Q Sales Soar.
Why Are You Still Renting? (Errr. There is More Than This to Consider!)
Wealth Myths That Keep You Poor. Prosperity Truths That Make You Rich.
Technology and Silver are Golden.
Real Estate: Feeling Equity Rich? Make Sure That Feeling Isn't Fleeting.
Airline Revenue Plunges 86%.
10 Questions for College Success.
Is FDIC-Insured Cash at Risk of a Bank Bail-in Plan?
8 Money Myths, Money Pits, Scams and Conspiracy Theories.
Why Are My Bonds Losing Money?
The Bank Bail-in Plan on Your Dime.
Please note: Natalie Pace does not act or operate like a broker. She reports on financial news, and is one of the most trusted sources of financial literacy, education and forensic analysis in the world. Natalie Pace educates and informs individual investors to give investors a competitive edge in their personal decision-making. Any publicly traded companies or funds mentioned by Natalie Pace are not intended to be buy or sell recommendations.
ALWAYS do your research and consult an experienced, reputable financial professional before buying or selling any security, and consider your long-term goals and strategies. Investors should NOT be all in on any asset class or individual stocks. Your retirement plan should reflect a diversified strategy, which has been designed with the assistance of a financial professional who is familiar with your goals, risk tolerance, tax needs and more. The "trading" portion of your portfolio should be a very small part of your investment strategy, and the amount of money you invest into individual companies should never be greater than your experience, wisdom, knowledge and patience.
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About Natalie Pace
Natalie Wynne Pace is an Advocate for Sustainability, Financial Literacy & Women's Empowerment. She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical), with over 120,000 downloads and a mean 5-star ranking. The 5th edition of The ABCs of Money was released on September 17, 2021.
Natalie Pace's easy as a pie chart nest egg strategies earned gains in the last two recessions and have outperformed the bull markets in between. That is why her Investor Educational Retreats, books and private coaching are enthusiastically recommended by Nobel Prize winning economist Gary S. Becker, TD AMERITRADE chairman Joe Moglia, Kay Koplovitz and many Main Street investors who have transformed their lives using her Thrive Budget and investing strategies. Click to view a video testimonial from Nilo Bolden.
Natalie Pace is the co-creator of the Earth Gratitude Project and the author of The Power of 8 Billion: It's Up to Us, The ABCs of Money, The ABCs of Money for College, The Gratitude Game and Put Your Money Where Your Heart Is. She is a repeat guest & speaker on national news shows and stages. She has been ranked the No. 1 stock picker, above over 830 A-list pundits, by an independent tracking agency, and has been saving homes and nest eggs since 1999.