We are in the middle of one of the seasonally strongest periods for equity markets, yet we have some potential speed bumps in the weeks ahead.
President Biden is expected to announce his pick for Federal Reserve Chairman before Thanksgiving. It is anticipated that he will either renominate current Federal Reserve Chairman Jerome Powell (R) or Fed Governor Lael Brainard (D). Many believe Chairman Powell has done an excellent job and should be renominated. Others think President Biden may choose Fed Governor Brainard as an appeasement to the more progressive wing of the Democratic party who may feel they were forced to capitulate on recent legislative issues. Both are highly qualified, and neither are expected to change the Fed's current path; however, any change at the Fed could cause a ripple through markets. I don't have any inside information, but if President Biden wants to make a change at the Fed, it may come after the market closes Wednesday, giving market participants something else to digest with their Thanksgiving turkey.
We're about to revisit the debt ceiling drama. You may recall that Congress approved an extension of the national debt limit in October. U.S. Treasury Secretary Janet Yellen has shifted her estimate of how long the government's debts can be paid from December 3rd to December 15th. We have never defaulted on a bond payment, and it is expected that after a period of public theater, Congress will again raise the debt limit. Defaulting on our debt is a low probability, high consequence event that could move markets as we approach a potential default. A default could result in missed bond payments, social security checks, and military payroll being delayed. Markets would have a dramatic reaction if the U.S. were to default on any debt.
After Thanksgiving, we can look forward to a potential government shutdown dominating headlines again. Congress did not pass the necessary appropriations bills in September to fund the government for the fiscal year, which started October 1st. Instead, Congress passed a (CR) Continuing Resolution to avoid a government shutdown. Congress must pass the required appropriations bills or another CR by December 3rd to avoid a government shutdown again. It is expected that Congress will opt to pass another CR, kicking the can down the road into next year. There is a risk that politics could come into play and force a temporary government shutdown. Markets do not like uncertainty or instability; however, the reality is that a government shutdown is not a permanent condition. Previous government shutdowns have not resulted in lasting economic harm.
After impressive 2021 market returns, many are sitting on significant taxable gains. With the threat of changes to the tax code, some may elect to sell into yearend to realize taxable gains in 2021. If we begin to see tax-related selling, I expect those funds to come back into the markets in January.
In recent weeks we've seen a rise in COVID cases again in thirty states and areas around the globe. As winter approaches, more people in colder climates are spending more time indoors. This week Austria reinstated a lockdown and mandated vaccination for their population. In neighboring Germany, there are broad restrictions for public transportation, restaurants, and other public venues. In some places, they are canceling holiday events. When asked about a lockdown in Germany, the German health minister said nothing could be ruled out. The rise in COVID cases has caused doubt in the expectations for global growth. Crude oil prices have fallen 4% to a six-week low. Growing economies have higher energy needs. If growth estimates are revised down, the forecasts for energy prices are also revised down. Although there is nothing good about rising COVID cases, the silver lining is that a slower global recovery will put downward pressure on energy prices and inflation concerns and could give the Fed more time to adjust monetary policy.
Do you remember that time when everything was good, and there wasn't anything to worry about? Neither do I. I don't have a crystal ball; I can't see the future or defy gravity. I expect we'll have increased volatility in the coming weeks as the political issues play out. The economy is in good shape, corporate profits have been better than expected, and earnings estimates have been growing. I don't worry too much about things that could cause short-term market gyrations. I'm watching for conditions that could lead to a recession. I don't see anything like that currently. I will continue to monitor markets and the economy and will keep you advised. Please call me with any questions or concerns.