Third quarter earnings are led by strong performance in the financial sector looking towards a staggering 45% year-over-year growth for corporate earnings according to Fidelity. This is the fourth quarter in a row that corporate earnings trended towards a surprise upside, helped in large part by a strong boost in commodity prices due to increased demand.

Earnings and revenue growth have remained positive throughout 2021, with some analysts foreseeing a slight pullback going into 2022. Macroeconomic trends and supply chain bottlenecks will carry a strong influence on global production. Domestically, increased M&A activity and consumer stock market confidence boosted performance as many Americans are pouring capital into the markets. Overall, U.S. consumers are in good shape thanks to a combination of fiscal stimulus and record housing prices.

Source: Zacks Investment Research

The coming months should still hold higher prices and inflation on the horizon, but if demand continues to remain strong for goods and services, then we may experience the mild, transitory inflation expected by the Fed. The labor market is in limbo as corporations posted the highest amount of job openings in twenty years, but unemployment remains above average.

Yellen: Prices will remain high through the first half of 2022

Inflation is a hot topic in every market as U.S. consumers gear up for one of the most expensive holiday seasons in recent years. However, Treasury Secretary Janet Yellen is optimistic for the second half of 2022 as supply bottlenecks are expected to ease.

According to Federal Reserve Chair, Jerome Powell, high inflation is a concern, but plans are in place to taper bond purchases and ease other Fed purchases. However, the Fed plans to remain patient before raising interest rates. Raising the U.S. debt ceiling is “utterly essential” according to Yellen.

Both Yellen and Powell are confident in America’s ability to navigate through this inflationary period. According to Yellen, “the core of our financial system did very well because of the improvements in capital liquidity, risk management, stress testing,” Yellen said. “And those improvements have stayed in place during the Powell regime.” The takeaway for investors is to expect asset prices to remain high until the supply chain bottleneck subsides, and to enjoy lower interest rates while the Fed keeps them down.

Prepare for the largest Social Security COLA since 1981

Social Security payments are essential for seniors, and account for 90% of total income 25% of seniors according to AARP.

Supply delays, pandemic demand shortages, and recent inflation are all causing prices to increase for almost every metric in the Consumer Price Index (CPI) leading to the highest Social Security Cost of Living Adjustment (COLA) in decades.

Source (SSA and AARP)

Seniors and retirees are among the most vulnerable to rising costs due to limited earning potential and relatively fixed income. The Social Security Administration announced the increase of 5.9% for 2022 to help seniors cover their expenses.

As supply catches with demand and the supply chain shortage resolves through the coming years, prices are expected to stabilize. In the meantime, the COLA will provide a much-needed reprieve for consumers dependent on Social Security benefits.

The graph above shows the history of COLA since 1975, with 2022 only less than the 14.3% increase in 1981.

Wealth management services at big U.S. banks are cash cows thanks to securities backed loans

The third quarter of 2021 resulted in massive success for the wealth management arms of some of the largest U.S. banks including Morgan Stanley, Merrill Lynch, and Goldman Sachs. Much of the performance centers around fees earned on loan revenue.

Government measures implemented during the pandemic eased the economic burden for borrowers by lowering interest rates which led to a stock market rally. This led to a double-edged opportunity for investors to borrow against their investment portfolios at very low rates. Wealth managers for high-net-worth clients are seeing loan balances up 30% year over year at Morgan Stanley, and 10% at Merrill Lynch.

In the last year, Bank of America has received over $112 billion in new wealth management balances – a trend that carries through many of the biggest banks.

What does this mean for investors? An influx of new investment and capital commitment to wealth managers can be indicative of positive economic sentiment. As investors continue to invest in the stock market while simultaneously borrowing against their portfolios at a lower rate than their investment returns, the market will continue embrace the influx of capital. However, if rates rise sharply, there may be a steep drop in new loans which could constrict spending.

What’s New at Lake Street

The Lake Street team continues to grow! On November 1st, Brian DeGrado and Steve Weber joined Lake Street after working together at JP Morgan and Raymond James. Brian is a Senior Vice President with 20+ years of experience advising ultra-high net worth individuals and their family. Steve has been working alongside Brian as a Senior Client Associate. To learn more about Brian and Steve, please check out their bios on our website below!

Brian DeGrado & Steve Weber

Articles We’re Reading

Facebook Changes Company Name to Meta… (link)

Florida Ports May Offer Supply Chain Crisis Relief…(link)

Soaring Energy Prices Pose Inflation Risks as Supply Constraints Persist… (link)

Market Snapshot

For the Month Ending 10/31/2021 (Cumulative Returns)1

1Source – Morningstar, Inc. Corporate Bonds is presented as the iShares iBoxx $ Investment Grade Corporate Bond ETF. Municipal Bonds is presented as the iShares National Municipal Bond ETF. High Yield Bonds is presented as the iShares iBoxx $ High Yield Corporate Bond ETF. 10 Year Treasury refers to the valuation of a 10 Year Treasury Note, a debt obligation issued by the U.S. Department of the Treasury. Fed Funds Target represents upper limit of the federal funds target range established by the Federal Open Market Committee. Inflation Rate provided for the purposes of this report by the U.S. Bureau of Labor Statistics. Unemployment Rate calculated by the U.S. Bureau of Labor Statistics. WTI Crude Oil refers to the price of a barrel of West Texas Intermediate NYMEX) Crude Oil. Gold – Spot Price relates to the valuation of an ounce of gold, as traded on the NYSE Arca Exchange. U.S. Dollar refers to the U.S. Dollar Index (DXY). All Returns are denominated in USD (United States Dollar), unless otherwise explicitly noted.

Did You Know?

Hertz teams with Uber, Carvana in another shift to EVs:

Car rental firm, Hertz, only emerged from bankruptcy four months ago, and they are implementing three aggressive innovations in their strategy to turn their industry on its head. First, they ordered 100,000 Tesla electric vehicles (EVs) which boosted Tesla’s market cap past the $1 trillion mark. Next, they signed a partnership with rideshare titan, Uber to give their highest-rated drivers access to EVs.

Under these terms, top-rated drivers can rent a Tesla from Hertz at a discounted weekly rate. Finally, they entered into an agreement with Carvana where Hertz will give priority to the online car dealer when they sell off rentals they no longer want to maintain in their fleet.

These moves indicate many large automotive service companies are increasing their bet on the future of transportation; especially the prevalence of EVs in these deals. …(link)

Hertz 1-Year Chart from Google Finance

Presented by the Investment Committee of Lake Street, an SEC Registered Investment Adviser

The information contained herein constitutes general information and is not directed to, designed for, or individually tailored to, any particular investor or potential investor. This report is not intended to be a client-specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful. Investing involves risk and you may incur a profit or a loss.