November Market Perspective
After getting off to a weak start, the U.S. equity markets regained momentum throughout October as the S&P 500 posted its best month of the year, gaining 6.91% and 22.61% year-to-date. The Dow and NASDAQ also had solid gains for the month of 5.84% and 7%, respectively. Stocks were supported by a strong start to 3rd quarter corporate earnings season, with more than 80% of companies beating analyst’s expectations. Also giving stocks a tailwind was October’s employment report showing 531,000 jobs were added when the expectations was for only 450,000. What’s more, the September jobs report was revised and increased from the initial 194,000 jobs added to 312,000.
The bond markets had a much bumpier ride throughout October. With the yield on the 10-year Treasury hitting a high of 1.7% during the month and with the outlook for interest rates and inflation uncertain, bond prices experienced another losing month and adding to the more than 2% loss year-to-date 2021.
Without question, the level of inflation will in large part determine the action taken by the Federal Reserve and the direction of the investment markets in coming months. October’s Producer Price Index (PPI) came in above expectations at 0.6% and 8.6% from one year ago, and October’s core PPI – which excludes volatile food and energy prices – at 0.4% and 6.8% from one year ago. The October Consumer Price Index (CPI) report showed an increase of 6.2%, the most since December 1990, and the core CPI – which also excludes volatile food and energy prices – at 4.6%, the most since August 1991. The U.S. equity markets across the board sold off on the release of the October CPI. Although hourly wages have increased about 4.9% over the past year, rising energy, shelter and vehicle costs have more than wiped them out.
Monthly employment reports are closely watched as the 10+ million jobs available in the U.S. was a major contributor to the economy’s poor performance in the 3rd quarter as GDP – the value of the goods and services produced in the economy – was reported to be 2%. October’s strong employment report was very welcomed news, showing that many more Americans are returning to the job. While inflation may not decline from these levels anytime soon, rising GDP and employment may help the U.S. economy absorb the rising inflation.
The market’s concern over corporate earnings is not so much in the 4th quarter of 2021 as 80% of the companies that reported in the 3rd quarter reported earnings above their expectations, but the sustainability of earnings is 2022. The Dow, S&P 500 and NASDAQ have all reached new highs in recent weeks. It will take similar levels of earnings to keep these indices rolling. As long as the employment picture continues to improve, that may be very possible.
We are paying very close attention to the economic metrics driving the U.S. economy and the global investment markets and making portfolio adjustments as deemed prudent. As always, please feel free to contact Haley or me if you would like to review your investments in detail or discuss our portfolio strategy going forward.