Risk Factors to Watch

5 Risk Factors to Watch in the Third Quarter of 2021

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Though we’re still in the midst of the COVID-19 pandemic, with the number of vaccinations increasing and the great reopening upon us, we’re reemerging from our bunkers in full force.

While we’re feeling pretty good about our reemergence, there’s always risk to look out for.

Here are the top five risk factors that might impact you and your financial planning in this third quarter of 2021. Let’s take a closer look.

Virus Mutations and Lingering Effects of COVID-19

This has been our No. 1 risk for a while. The Delta variant of the COVID-19 virus strain is more contagious and is fast becoming the world’s dominant strain. This is problematic, as many people remain unvaccinated and the vaccines seem less effective against the Delta variant.

The Delta variant spread might slow down economic activity. Different countries have handled different stages of the COVID-19 pandemic well. The U.S. has done extremely well on vaccinations – with 56.2% of the population having received at least one dose and 48.8% of the population fully vaccinated as of July 18, according to the Mayo Clinic. While the vaccines seem very effective, not everybody is vaccinated, either due to lack of availability or by choice.

Even countries that handled the early stages of the pandemic well – like Australia – haven’t achieved the same level of vaccination as the U.S. There’s potential that countries with lower levels of vaccinations will need to shut down. If anyone, anywhere shuts down their economy, it detracts from global economic activity.

However, we’d likely handle a second round of shutdowns better than the first. The economic damage of a second round wouldn’t be as bad as during the initial shutdown, but this could put us back in a situation where more jobs are at risk.

One lingering effect of the pandemic has been slower-than-expected recoveries in the job market. While last month was strong – we added more than 850,000 jobs – overall, people aren’t returning to the job market as quickly. Despite many open positions, companies are reluctant to increase pay to lure jobseekers back.

Concerns over the spread of the Delta variant could delay people from going back to work. This means we are short their contributions in both labor and spending.

Also contributing to the slowness of the recovery is that some people’s bank accounts may be in decent shape due to the added unemployment benefits and the periodic checks we’ve received from the government. Some people may wait a little longer to return to the workforce or wait for a job they’re really passionate about, but once those benefits wear off, I would expect to see people applying for and taking jobs.

Contention with China

We’ve seen China continue to be more and more aggressive with its foreign policy as it tries to elbow out its space in a world that’s been dominated by the U.S. for decades.

There are certainly points of contention between the U.S. and China, as we recently saw with the ride-sharing app Didi, which went public in the U.S. over Chinese government objections. Almost as soon as it was public, the Chinese government said there were security issues with the app and they’d have to stop it from taking on new customers, which hindered Didi’s business.

The Chinese would like to move into higher value-added technology products in order to get higher-paying jobs, but the U.S. prevents some Chinese companies from doing business in the U.S. The treatment of minorities within China, and issues with China becoming more assertive also contribute to potential risks.

We continue to see contention between the world’s two largest economies, and this is one of the biggest geopolitical risks that could have an economic impact.

Policy Mistakes

Another risk factor this quarter is policy mistakes. These could come from either the Federal Reserve or the Biden administration.

In mid-June, the Federal Reserve signaled that interest rate hikes could come in 2023 – sooner than previously thought – in response to a strong economic recovery from the COVID-19 pandemic and higher-than-anticipated inflation. It’s becoming a tougher line for the Federal Reserve to walk between raising interest rates too quickly and keeping its foot on the gas pedal too long, as far as economic policy.

There are also proposals from the Biden administration that could bring big changes – whether on tax policy or other types of support. For example, the American Families Plan Act proposes raising the ordinary income tax rate to 39.6% for people making over $400,000 per year and eliminating step-up in basis, both things that could impact your planning in 2021 and beyond.

We think there is a greater sense of policy risk now than there has been in a while.

Ransomware

In early June, JBS USA Holdings Inc. paid an $11 million ransom to cybercriminals after its plants – which supply about one-fifth of the nation’s meat supplies – were knocked out in a ransomware attack.

That’s one example of recent disruption and risk coming from ransomware attacks, which have skyrocketed in recent months and are new on our list. Ransomware attacks encrypt and lock victims’ computer systems until the attackers are paid a ransom to unlock them. Yahoo! Finance recently reported that in recent attacks, sensitive data has also been extracted, with criminals threatening to release it online if they aren’t paid more quickly.

Ransomware is popping up more often for a lot more organizations – Yahoo! Finance reports attacks have increased 93% each week over the last 12 months – either because of political support by certain governments or a blind eye.

Investor Behavior

We may continue to see some impact from both the initial pandemic downturn and the recovery in this quarter in terms of investor behavior, which is one risk factor we always want to stress.

When investors are hit with something they weren’t expecting – like the initial COVID-19 market crash – and they’re exposed, they tend to overreact. The overreaction actually does more damage than the initial downturn, because once investors are out, they don’t have a path back in, as their decision was emotional versus rational. So they have to wait until they calm down – which can be months, maybe years – and that can set people’s retirements back a long way.

Also, we’ve generally seen that as interest rates have been pushed down, investors are pushed out of safer securities. Investors are starting to say, “Why do I own bonds?” or “What’s cash doing in my portfolio?” or “Why don’t I chase after this next shiny object?” Just because bonds are yielding very low doesn’t mean you should exclude them and push your money into equities.

As such, we’re seeing a general overall risk creep into portfolios as investors start to wonder why they should own bonds when the yield is so low. They start to forget that risk management is the first primary objective of fixed income, and yield is the second.

Adding to this situation is that the stock market has gone up for five straight quarters – so the wind has certainly been in our sails. We’ve recovered greatly from the initial rough period due to COVID-19. People, especially if they’ve been hit by something hard and their portfolio rallies back quickly, are feeling like they’re doing well.

Remember the end of 2019, when it appeared as though major risk factors were starting to get resolved and it wasn’t clear what the next risk factor was? But there was COVID-19, already looming. So it’s key to remember that risk is always out there, and risk management is part of protecting you from the unknown.

Final Notes

While we do see inflation as a risk, we don’t see it as a top-five risk. We think fears about inflation are overblown. The things we talked about last quarter continue to hold true: There are structural factors in the economy that make us less prone to inflation than we were in the 1970s. This includes our greater degree of energy abundance and alternatives to fossil fuels, our more fuel-efficient economy and more alternative energy sources.

We’ve seen high spikes in inflation data, but they’re contained to specific areas like cars and lumber – plus, those supply shocks have started to wear off and prices have gone back down. So while we’re expected to continue to see high inflation, it’s not going to be like the inflation we experienced in the 1970s.

Continue to stay prepared by reading our Weekly Market Commentary and checking in with your financial advisor. Think about how your plan integrates with the market, and ensure you’re not trying to ride a wave of positive returns as opposed to focusing on your overall goals.

Our Quarterly Market Outlook webinar will give you a more in-depth look into what to watch out for this quarter. Watch it here.

The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results.

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