In September the days grow shorter, the nights are cool, and the stock market gets crazy. The first two are easy to explain but the third is a mystery. However, this year was a good example. In the last ten days of September the Dow Jones Industrial Average had four moves of greater than 500 points. That compares to only three such moves in the previous four months. Clearly traders came back from summer vacation ready for action.

As always, there are lots of things to worry about. In no particular order:

  • Mitch McConnell and the Republicans are threatening to refuse to pass an increase in the US debt ceiling, thus causing the US to default on its sovereign debt. No sane person actually thinks this will happen, but the theatre and the drama are irresistible to the press.
  • Headline rates of inflation are the highest in years. The Federal Reserve Bank and the Bank of Canada say its all temporary, caused by supply chain disruptions as a result of the worldwide COVID pandemic, but supermarket prices are up, prices at the gas pump are way up, and the crowd is growing restless. The traditional cure for inflation is higher interest rates, and in a world addicted to cheap, almost zero-cost money, that’s a scary thought. We side with the central bankers, and believe the current inflation will prove to be transitory.
  • Stocks have been on a terrific tear for the last year, with lots of names at or near all-time highs and with most portfolios showing gains in the double-digits over the past twelve months. Many pundits are predicting a drop, or at least a pause, in stock market gains.
  • There are lots of signs of problems in China, the 2nd biggest economy in the world. A huge real estate development company is on the brink of bankruptcy, and the government is becoming increasingly intrusive into business affairs. China now wants to control how many hours of video gaming kids can play each day, how crypto currency can be created and sold, and who gets to see what on the internet. Suddenly the capitalist world is remembering that China is a totalitarian communist dictatorship. People in Hong Kong could have reminded them earlier.
  • Canada has elected its second successive minority government with a weak mandate to not do much of anything, except perhaps to raise taxes on the banks and the wealthy. The balance of power lies with the NDP who pledged, as usual but with somewhat more force, to tax the rich, tax their wealth and too bad if the rich decide they don’t want to pay and take their fortunes offshore.

A piece of oft repeated wisdom is that markets climb a wall of worry. It is wise because it is true. There are ALWAYS things to worry about, but sometimes, they become more top of mind. For us, the most important thing remains the progress of the companies in which we invest. We will start to see earnings for the third quarter of the year in about two weeks. So far, things are looking good, simply because no significant company has warned that profits will be lower than expected.  Stock prices follow earnings. In the end, the rest turns out to be sound and fury, signifying very little. Noise that hides the signal.

We have had a great first three quarters of the year. If earnings come in as anticipated, we should end with a good fourth quarter as well.

David Baskin