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Political dysfunction in Washington.

Divisions in Congress continue to rage as efforts to address the looming debt ceiling and pass the bipartisan infrastructure package remain stymied. Senate Republicans refuse to raise the debt ceiling in order to pay for expenses previously appropriated, and spent, by Congress. An intraparty hostage situation is taking place between the moderate and progressive wings of the Democratic Party. Moderates want to move forward on infrastructure, while progressives want to use the infrastructure bill as leverage to pass the reconciliation package.

The debt ceiling will likely get resolved as it has the greatest potential to inflict unnecessary damage on the U.S. economy. The infrastructure and accompanying reconciliation bill standoff are on shakier ground. How this will play out in the end is TBD, but right now there is a mean game of chicken going on to see who will blink first.

The Fed’s timeline shift.

Recent moves in the bond market have led to a rotation of funds out of higher growth oriented names and into more cyclical areas of the stock market. The market is reacting to the perception that the Federal Reserve will likely start easing into a more restrictive monetary stance. The Fed will begin with the winding down of mortgage-backed bond purchases by year end, with a probable rise in interest rates to follow suit in 2022. The more persistent inflation numbers, while not alarming to the Fed, are potentially the reason for the bumped-up timeline. Supply constraints are being pointed to as the culprit, rather than demand pressures. The Fed maintains inflation will prove transient over time.

While rising rates do lead to volatility as the market adjusts to new perceptions, I do not believe it necessitates a massive overhaul away from growth into value.

Supply constraints and earnings expectations. 

Supply constraints are proving more difficult to resolve as goods are increasingly facing bottlenecks at U.S. ports and other global locations. Two timely examples of how logistics and supply issues can gum up the economic works? The fuel shortage in Great Britain and the semiconductor shortages in the auto industry. Earnings expectations are beginning to be tempered heading into the end of the year. See Bed Bath and Beyond’s most recent earnings announcement, for example. The company was hit by both supply chain concerns and inflation, resulting in a miss on revenues and profits for their most recent quarter.

Still, it does not appear that analysts have given up on the recovery story for 2022. It is more a realization that the recovery has been slowed somewhat due to the Delta variant fueled COVID-19 surge and supply chain obstacles.

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