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Stephen M. Mills, CIMA® Managing Partner

PIM Portfolio Manager

Brad Bays, CIMA®


PIM Portfolio Manager


• Stocks suffered the first monthly loss since January 2021 the first 5% correction since October 2020 as measured by the S&P 500 Index.

• The U.S. economy remains strong despite a summer slowdown due to a surge in Covid-19 cases.

• The U.S. Federal Reserve indicated in its September meeting the possibility of beginning a gradual tightening process in its monetary policy later this year.

• We see robust U.S. economic growth for the remainder of 2021 and into 2022.

• We remain optimistic for the prospects for stocks over the next 12 to 18 months.


September lived up to its reputation of being one of the worst months of the calendar year for stocks.  The Dow Jones Industrial Average fell just over 1,500 points recording a loss of 4.3% while the broader based S&P 500 Index fell 4.7% for the month.1   This was the worst monthly performance for the major stock market averages since March 2020 when stocks were hit hard by the coronavirus pandemic.  We believe the reason for the weakness includes rising inflation risks, a slowing of the U.S. economy due to the surge in Covid-19 cases, concerns about the Chinese economy, and prospects for higher taxes as Congress looks to pass two spending bills.  Given the negative backdrop for stocks, we are surprised the major averages held up as well as they did.  

Since November 2020, stocks have been on a tear rising nearly every month without as much as a 5% correction.  This is highly unusual since corrections of 5% typically occur on average about 3 times per year.  According to a study done by Dorsey Wright, since 1927 through July 16, 2021, the S&P 500 Index has dropped by 5% every 107 days or a little over 3 times per year.2   We were in our 11th month without a 5% pullback this past September until the last day of the month when the S&P 500 Index officially hit the 5% correction mark.1  This streak of 341 calendar days without a 5% pullback is the longest such stretch since February 5, 2018.  Dorsey also did a study on the history of 10% corrections in May 2021 citing such pullbacks occur on average once per year.  We view these types of adjustments in a long-term bull market as healthy for stocks and tend to extend the life of the bull market. 

We believe this recent pullback in stocks was overdue and helps to correct some of the speculative excesses that had been developing this year in certain areas of the market.   We feel the positive fundamental conditions that have been in place since the beginning of this bull market in late March 2020 remain and will continue to fuel stocks higher over the next twelve to eighteen months.  In particular, we see the favorable monetary and interest rate environment created by the Federal Reserve since the beginning of the pandemic continuing to spur investors to put cash to work in stocks.  Currently, with interest rates at extremely low levels for short-term cash investments, CD’s and bonds, we feel the best place to put cash to work and achieve a positive inflation adjusted return is stocks.  For this reason, we believe the “buy the dip” mentality will continue until either monetary conditions tighten materially or economic conditions deteriorate.  We see neither of these risks occurring any time in the near future.  In fact, we believe as the recent coronavirus surge subsides over the next few weeks, the economy will return to robust growth for the next several quarters. 

We see both consumer and business spending picking up through the end of the year.  The U.S. Department of Commerce reported a pickup in consumer spending in August recently after a weak July number, an indication  the U.S. economy may have upward momentum heading into the fall.3   As you can see in the charts below, consumers have paid down debt and built-up net worth over the past eighteen months and appear poised to possibly open up their pocket books heading into the holiday season. 

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Sources: Bloomberg, Federal Reserve Board, and Wells Fargo Investment Institute. Consumer balance sheet data as of June 30,  2021. Household debt service ratio: quarterly data from January 1, 1980 to March 31, 2021. Household net worth: quarterly data from January 1, 1990 to June 30, 2021.

We see consumer spending, which accounts for two-thirds of U.S. GDP, returning to the pre-pandemic levels as we move into the fourth quarter of 2021 and the first half of 2022.  Specifically, we see strong demand for housing, autos, appliances, technology, and other retail goods and services driving economic activity and spurring on businesses to ramp up spending and investments to meet consumer demand. We believe this economic activity will help drive U.S. GDP growth for the next several quarters and propel corporate earnings to new all-time highs.  Wells Fargo Investment Institute (WFII) forecasts 2021 S&P 500 earnings at $210 for 2021 and $230 for 2022 as of September 23, 2021.4  Both forecasts represent all-time highs for S&P 500 earnings.  Corporate earnings are one of the key drivers of stock prices along with interest rates and investor sentiment.  We believe if these forecasts can be met, stock prices could move significantly higher over the course of the next twelve months.  WFII forecasts a 2022 price target for the S&P 500 Index in the range of 4900-5100.4  That’s represents about a 11-14% price increase from the current S&P 500 Index level of about 4400 as of the date of this letter. (Forecasts and estimates are not guaranteed and based on certain assumptions and WFII’s current views of market and economic conditions, which are subject to change.)

While we agree with WFII’s growth targets for the S&P, we don’t think it will be smooth sailing for the stocks over the next several quarters.  There are a number of potential headwinds that could cause turbulence in the financial markets.  One potential headwind is the recent emergence of inflationary pressures.  Recent inflation reports indicate the annual rate of inflation for the U.S. economy is running in the 5-6% range, well above the 2% level we have experienced over the past several years. Although we see this bout of inflation as temporary lasting perhaps a few quarters, it is cause for concern in the short term for markets.  If inflation turns out to be more persistent that most economists believe, it could push longer term interest rates higher which could encourage investors to shift funds out of stocks and into bonds.  While we see this scenario as a low probability, it is a risk factor that must be taken into consideration in making asset allocation decisions. 

Another headwind for the market is the potential for the Federal Reserve (Fed) to change their monetary policy and begin a tightening process.  The Fed has been very accommodative in their monetary policy since March 2020 to combat the negative economic impact of the coronavirus pandemic.  At the time, the Fed lowered short-term rates and began purchasing various types of bonds to inject liquidity into the system. We believe this policy has played a major role in allowing the economy to recover from the severe decline caused by the pandemic during the summer of 2020.  As of the date of this letter, the Fed continues to purchase $120 billion per month of U.S. Treasuries and mortgage-backed securities.  However, in the September Federal Open Markets Committee (FOMC), the Fed signaled a potential shift in its monetary policy.  Specifically, the Fed indicated it may begin “taping” their monthly bond purchases later this year which would be viewed by investors as a first move to tighten monetary policy.  Although such a move by the Fed to taper bond purchases might cause some near-term volatility in stocks, we believe the Fed will be very measured in the pace of any tightening so as not to derail the economic recovery and potentially kill the bull market in stocks.  As far as when the Fed might raise interest rates, FOMC members were split on the timing of potential interest rate hikes.  Most economists feel it will be late 2022 or 2023 before the Fed begins raising interest rates. 

Lastly, there are ongoing negotiations around two proposed spending bills and the debt ceiling increase. Both sides of the political isle are bitterly divided on the two spending bills, one of which is the bipartisan $1.2 trillion infrastructure bill and the other is the $3.5 billion dollar budget reconciliation package proposed by House Democrats.  The big problem for stock market investors is both sides are using the requirement to raise the debt ceiling in order to keep the government running as a pawn in the negotiations for the two bills, particularly the $3.5 trillion House bill.  Failure to raise the debt ceiling by the October 18 deadline, which appears will be extended to mid-December, would result in a government shutdown which no one wants and a possible debt default by the U.S. government.  It’s a game of chicken that Congress seems to play every few years when there is strong opposition to government spending.  There has been and will likely continue to be a lot of hyperbole and rhetoric coming out of Washington about a potential U.S. debt default and the “catastrophic” impact on our economy if the debt ceiling does not get raised.  While we believe this political theater is all posturing by both sides to get what they want, in the end, we are confident the ceiling will be raised and the U.S government will not default on its debts.  However, over the next several weeks, as the game of chicken intensifies, we could see some near-term volatility in stocks. 

In summary, we see a reacceleration in economic activity in the fourth quarter of this year and into at least the first half of 2022.   We see stocks resuming their upward path soon but warn of more near-term volatility due the issues discussed above.  We would use any weakness in the stock market as an opportunity to add cash to stocks in portfolios when appropriate for your situation. We feel stocks continue to present good value for investors with longer term time horizons.

As always, we greatly appreciate your continued trust and confidence in us and we will continue to work to keep you informed of economic and market developments. 

Your Trinity Capital Management Team

Trinity Capital Management, 821 ESE Loop 323, Suite 100, Tyler, Texas 75701.  903-747-3960.


  • Thompson quote system
  • Dorsey Wright, Daily Equity Market Analysis, July 19, 2021
  • The Wall Street Journal, Consumers Ramped Up Spending in August, October 5, 2021
  • Wells Fargo Investment Institute, Economic and Market Strategy Update, September 2021

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