By David Nelson, CFA CMT

September all but wiped out the strong start to Q3 with both the Dow and NASDAQ ending the quarter in the red leaving only the S&P 500 fractionally in the green up just +0.58%. There was no shortage of suspects to blame. Rising yields, a coming taper, Delta, China, inflation, and a near dysfunctional Washington that saw the President’s approval ratings drop double digits all weighed on investor sentiment.

FactSet Data

While many will point to the rising 10-year yield, at just 1.46% it is well below the free cash flow yield of the S&P 500 sitting north of 4%. However, the velocity of the move as pointed out by Goldman in a recent note was a 2 standard deviation event on a 10-day basis. The fear real or unjustified is that yields will push above 2% or higher before the Fed has even started to Taper.

Supply Chains

All of the above are valid concerns but perhaps the latest wrinkle in a post Covid world is the increasing supply chain disruptions hitting every sector of the economy. The challenge is real, and the chart below shows just how far off the scale it is from the norm.

FactSet Data

Fifteen years is enough time to define the channel where most of the data lives. ISM Supplier Deliveries are on top and for context the S&P 500 on the bottom. Anything above 50 indicates slower deliveries. The biggest spike was at the peak of the COVID crisis last year in the grips of a complete shutdown of the world economy. Today, eleven months after the introduction of a vaccine many companies are still struggling to staff their businesses creating inventory shortages that continue to grow. Making matters worse, goods that make their way to the shelves are seeing increased prices.

Pandemic unemployment insurance benefits expired Labor Day. However, Rep. Alexandria Ocasio-Cortez, D-N.Y. is about to introduce a bill to extend the program to February 2022. This can only make it that much more difficult for industry to get their employees back to work.

The competition for labor fuels the problem and late last quarter FedEx gave us an early look at what’s in store for the coming earning’s season. Lowering guidance management pointed to a big jump in wage costs, a problem that could get worse if Rep. Ocasio-Cortez’s legislation succeeds.

WTI Crude 5 Years

FactSet Data

Rising inflation expectations and shipping costs add to the problem. WTI crude is touching the highest level in 5 years. Energy touches almost every line item in the income statement.

With the S&P 500 living under the 50-day moving average and having breached the 100-day, trend followers are going to start to look at the 200 day as a potential target. Just how transitory these events are will really set the stage for what the closing months of the year will look like. Seasonally once we get past October the holiday cheer is supposed to give us a rally into the close of the year.

Let’s try to find something more sustainable than holiday spirit to drive the economy and stocks higher.

Silver Bullet


The biggest wild card and perhaps the silver bullet that could save the year came Friday morning. Merck (MRK) is seeking emergency use authorization in the U.S. for a Covid 19 pill developed with Ridgeback Biotherapeutics. When used properly the antiviral treatment has been shown to reduce the chances of hospitalization or death by 50%. Anthony Fauci, the White House chief medical advisor, said Merck will be submitting data to the FDA imminently.

Some have called this a game changer and may in part explain Friday’s feel-good rally on the heels of a miserable week for equities. It’s too soon to say but even if it falls short of 50% there are still millions unvaccinated. Anything that could reduce the hospital load or get many fearful of going back to work to resume their jobs can only bring increased economic output and with-it higher equity prices. How’s that for some holiday spirit?