Headwinds & Tailwinds: Investors are still scaling the wall of worry

By: Carol Schleif
Published: December 18th, 2021

“The truth is, there is no actual stress or anxiety in the world, it’s your thoughts that create these false beliefs.” —Wayne Dyer

The market’s collective propensity to worry quickly reasserted itself this summer with the spread of the delta variant of the coronavirus. Is the concern justified? There are plenty of arguments on both sides, but it is important to remember that there are ample concerns in virtually every investment period—and that over the long pull, the direction of equity markets tends to march upward, reflective of the perpetual level of growth in the economy. A long-term bet against markets is a long-term bet against economic progress.

That said, a variety of short- and intermediate-term issues can affect one’s assessment of—and tolerance for—risk. Understanding which risks are most pertinent for you (cash flow, liquidity, credit, tax, transaction costs) is imperative for building a long-term plan that fits your specific situation. 

Many factors could lead to market volatility through at least year-end. Much will be noise with little long-term substance. Below are some of the headwinds that may perpetuate the “wall of worry,” followed by a few tailwinds to help keep anxiety in check.

1) Psychological headwinds

• The delta variant (and perhaps others on its heels) has deflated hopes of a rapid return to some sort of “normal.” Some in the scientific community are warning that the coronavirus will be perpetually with us in much the same way as cold and flu viruses are.
• The fitful pace of reopening is likely to continue, especially as schools and businesses open, close, and reopen. Planning, projecting, and investing are all difficult in such a fluid environment, and investors must grasp that accurate earnings guidance will be tough to come by.
• Snafus in logistics and supply chains will likely take much longer to work out than originally hoped for given parts, labor, and commodities shortages. It’s tough to build cars without chips, and even if the chips are built it’s tough to get them from one point to another if there aren’t enough container ships or truck drivers.
• Wages and employer enticements continue to increase as employees in many sectors currently hold the power in much the same way as home sellers do. 
• Fed watching will remain many investors’ favorite spectator sport. Will they be too early or too late in withdrawing fiscal support and/or raising rates? How long is “transitory” going to be?
• The debt ceiling debate and related showdowns in Congress will likely produce ample inflammatory headlines. The debt ceiling itself was technically exceeded at the end of July and Congress does not (as of this writing) seem inclined to increase or suspend it until the 11th hour. Markets have come to expect this, but may become increasingly concerned should it drag out toward year-end. (“Christmas Cliff” anyone?)
• Environmental concerns and their impacts on individual businesses are increasingly front and center. Much of what is in both infrastructure bills could affect individual companies and sectors—both positively and negatively.
• Both infrastructure bills are likely to make slow and grinding process through Congress. They’re historically unparalleled and will create numerous opportunities for each elected official to get headline-worthy quotes assembled for use in next year’s midterms. Bottom line, both parties do seem to want to get something done, though passage will be hard-won given the close margins in both the House and Senate. 
• Then comes the concern over how to pay for all that spending. We expect lots of wrangling over increasing corporate taxes, capital gains taxes, and/or taxes on top earners. Each of these issues is likely to generate ample headlines.

2) Tailwinds

Amid the angst over the foregoing, it will be important to remember that many things are going right too. Ironically, the delta-induced reduction in activity and supply chain constraints may produce enough of a gating factor on economic activity to allow it to be extended much longer than would otherwise be the case. Key factors supporting economic progress (and eventually markets) include:

• Ample fiscal and monetary support.
• Consumer spending remains solid, even with the (hopefully) temporary setbacks of reasserted mask/social distancing mandates. We suspect the holiday season could be merry given even more pent-up demand anxious to be set free.
• Healthy businesses. Many trends already in place (telemedicine, AI, robots, enhanced shipping, WFH) were accelerated by a decade or more. Company balance sheets are cash rich, and GDP has returned to pre-pandemic levels with more than 6 million fewer workers in the force, implying massive improvements in productivity. 
• Consumers have substantial cash and power. Average wages are up, but even more progress is being made at the individual level given that quits rates are at record highs as employees leave for better pay and/or job arrangements better suited to their post-pandemic needs.
• The machinations of the infrastructure bills as they move through Congress could prompt a variety of tangential actions such as increase in M&A and or portfolio turnover of low-basis stock if specific items in “how to pay for it” categories look likely to pass.
• Similarly, there could be a push to get certain real estate transactions done in advance of a rewrite of 1031(b) exchange rules.

Bottom line

Given the number of important issues at play and looming midterm elections, we think this year’s final quarter and the start to 2022 will be anything but dull. For investors oriented to the long term and implementing their own well-thought-through plans, such potential volatility (where substantial noise is accompanied by solid underlying fundamentals) can provide interesting opportunities.

Carol Schleif is deputy chief investment officer at BMO Family Office, a wealth management advisory firm that provides family office services and investment advisory services to single family offices and wealthy families through an integrated planning and advisory approach. To learn more visit www.bmofamilyoffice.com.

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