Quarterly Review

Third Quarter Commotion

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(Is the pivot point approaching?)

This quarter did not play out as economists expected. There are many reasons, but this one dominates:  inflation, influenced by the latest path of the pandemic. Add the drama of the week (i.e., a Chinese developer’s default crisis), supply chain issues, labor shortages, current consumer confidence… we expect economists to use these factors to make reasonable predictions about the future. Economists are like fortune tellers, only more scientific and much stuffier. Still, it seems, neither economists nor fortune tellers could have accurately predicted what happened during what we thought would be the summer to recover.

Which is not to say recovery eludes us. The S&P 500 set 54 record highs through 3Q2021.1 The question for investors is, do those valuations reflect reality? The composite indices appear to fluctuate on the whims of daily news feeds and, it must be said, the inclination of speculators to buy meme stocks for fear of missing out. Of course, at Bahl & Gaynor FOMO is never a consideration. Our time-tested investment philosophy centers on a company’s cash flow, revenues, sound business models, and most importantly, long-term dividend growth. Of course, we have our eyes on these:


Housing, gas, food; these top the list of rapidly rising prices as supply chain and transportation issues persist. The September Consumer Price Index rose 5.4% over last year, matching the largest increase since 2008.2 This is slightly higher than what we paid for good and services in August, but markedly below price hikes in June. Higher inflation will trigger a 5.9% increase in Social Security benefits, the largest increase since 1982. High demand (as more people leave home and spend their money) coupled with low inventory, increasing wages and rising fuel prices have businesses passing their overhead expenses on to shoppers. The question becomes, how long will the disruptions last?


After two quarters of unusually high growth rates, corporate profits began falling in the third quarter, the estimated decline in the U.S. is 7.2%.3 If actual profits (released soon) bear out the estimates, it’s the first decline in 18 months. A slowdown was not completely unexpected; with tough year-over-year company comparisons and fiscal stimulus cash already spent, saved, or applied to debt by the consumer.4 The COVID delta variant no doubt fed the decline with disrupted global manufacturing and delayed hiring. The silver lining may be the very recent slowdown seen in COVID cases nationwide.


Far fewer Americans were added to payrolls in August (235,000) and September (194,000) when compared with July (1.1M).5 The Bureau of Labor says the retail and service sectors continue to be hit hardest. The good news:  the unemployment rate lingers near the pandemic low and is improving at a faster pace than seen after most recessions.  Jobs reports in the next two months could have a big influence over the path of the Fed’s tapering and eventual rate hikes.

The Fed

In their most recent update Federal Reserve officials indicated they may begin to taper bond buying as soon as November.6 Fed Chair Jerome Powell says the pandemic stimulus program could end by mid-2022, but he admits there may be a “difficult tradeoff” if both inflation and unemployment remain high. In order to cool inflation, the Fed may raise the federal funds rate (the rate at which banks borrow money). Higher interest rates mean higher borrowing costs. Businesses and individuals start spending less, the demand for goods and services drops, which causes inflation to fall. For consumers, rising rates can boost savings but also increase the cost of loans including home mortgages.


The strong housing market began to decline in August, with existing home sales down for the first time in 14 months. Still, those sales remain well above pre-pandemic levels and supply continues to decline. The high-end market is booming, with sales of homes priced above $1M up 40% over last year. First time buyers, who usually make up 40% of the market, now claim just 29% of all home sales. The National Association of Realtors lists the median existing home price at nearly $357,000.7

So, Is the Pivot Point Approaching?

It’s never been easier to invest in financial markets, but we believe many people have been doing so with a numbing indifference to risk. Herd mentality can lead investors to ignore what’s happening beneath the surface of those record highs; worsening breadth (declining companies outnumbering advancing), prices moving up on lower volume, and less margin debt (Investors are borrowing less to buy stocks. Are they losing confidence?).

The Big Board averages may not yet have seen their final highs, but sentiment is, by many accounts, turning bearish.8 Bubbles burst. Trying to time the market before a rapid decline is dangerous and often humbling. Note “The Greater Fool Theory” … it argues you can make money buying overpriced stock because there is usually someone (a greater fool) willing to pay even more for it. That works… until no greater fools remain.

We enter the fourth quarter with fresh tax proposals, large federal budget deficits and increasing inflationary pressures on the horizon. Still, despite pandemic pressures, it’s projected dividend payments will hit $1.39T in 2021.9  This includes so many companies issuing higher special dividends as a result of strong earnings.

At Bahl & Gaynor, we believe harnessing the power of dividends and compounding the proceeds are powerful moves, especially in the face of capricious markets. Investing isn’t just about making money; it’s about having the money you need when you need it. It’s about finding the balance between risk and reward that is appropriate for you.


1 https://bit.ly/3mNLcoF
2 https://www.bls.gov/news.release/cpi.nr0.htm
3 https://www.reuters.com/business/global-corporate-profits-fall-8-q3-after-record-q2-data-2021-08-25/
4 https://www.nber.org/digest/oct20/most-stimulus-payments-were-saved-or-applied-debt
5 https://www.bls.gov/news.release/pdf/empsit.pdf
6 https://on.wsj.com/3CJUjx5
7 https://cnb.cx/39yYoaA
8 https://bit.ly/3kA00ar
9 https://cnb.cx/3u3SNCO
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