November 2021 - Market Commentary
- Facebook plans to rebrand itself as “Meta”, signaling broader ambitions and attempting to diffuse criticism into censorship at the social media giant.
- Shipping delays plague the Port of Los Angeles, as companies like Home Depot, Costco, and Target have begun chartering their own ships to bring goods into smaller ports such as Portland. OR
- Pfizer, a holding in our opportunistic positions, reported a doubling of sales in the third quarter, with approval for their COVID-19 boosters and shots for children in the works.
- Tesla is in talks with both Hertz Global rental cars and Uber Tech ridesharing to provide electric vehicles to their customers, signaling further adoption of the technology, which also benefits chip manufacturers such as Nvidia, QUALCOMM, and Intel.
Tricks and Treats
With the annual passing of Halloween, what will the markets have in store for clients for the rest of 2021? Will investors be “treated” to a continuation of the post-COVID bull market? After all, stocks continue to reach new highs, with COVID cases declining as worries from the delta variant fade, and the prospects of an infrastructure bill passing in Washington increasing. Furthermore, the much anticipating tightening of monetary policy has been pushed out, however expectations are late-November will mark the beginning of a tightening cycle.
On the flip side, is there a “trick” before the end the year, as strained supply chains are threatening to spoil the upcoming holiday season, with strong demand overwhelming reduced production capacity and stressed shipping networks? Rising energy prices (both oil and natural gas) are a boon to that sector as an investor, but are not so attractive when they come at the expense of stifled discretionary consumer spending.
Equities Rally Despite Broad Based Pessimism
In the month of October, performance in most equity markets was robust. We believe that heading into the month, investor sentiment was overly bearish due to a tough September in which the S&P 500 fell 4.7%; partially in response to a sharp rise in inflation, as well as shifting monetary policy. Since this negative consensus was already partially (or fully) reflected in prices, as the winds rapidly shifted direction and positive news began to build, the change in the narrative resulted in upward market moves. Improving COVID case counts, coupled with solid corporate earnings reports, caught these bears offsides. As a result, the VIX index, a measure of market volatility, fell 30% since October 1st while the S&P 500 index returned a solid +7.0% during the month.
Economic Data Provokes Stagflation Debate
Stagflation talk increased in recent months as supply chain issues, rising energy prices, and inflation pressures led to concerns about slower economic growth. Slower third quarter GDP growth merits a closer look at the data. Stagflation is defined as a period of high inflation, high unemployment, and slow economic growth. Labor market data suggests the 4.8% unemployment rate is related to lower labor force participation and voluntary quits rather than layoffs. The question is how quickly the economy can get back to normal? In our view, supply chain, inflation, and labor market pressures will ease, and prove the market’s stagflation fears to be overblown.
Fortunately, the U.S. economy has not experienced many stagflation periods. While historical precedent is limited, current economic data has not deteriorated to a level consistent with stagflation. The third quarter rate of GDP growth slowed, but remained positive. The Federal Reserve recently upgraded its 2022 and 2023 GDP growth estimates, indicating it views the current economic environment as temporary. Consumer price inflation rose +5.4% year-over-year during September, but recent month-over-month trends show inflation is below the high levels experienced earlier this year.
In commodity markets, the price of WTI oil rose +10.9% during October as demand increased and oil production lagged behind. The Commerce Department’s preliminary GDP estimate indicates the economy expanded at a +2% annualized pace during the third quarter. It was a slowdown from the +6.3% and +6.7% recorded during the first and second quarters, respectively, earlier this year.
What Are We Doing?
We are not making any drastic shifts to asset allocation in the near term, especially given that stagflation should be reflected in current pricing, and thus is not worth chasing. Chasing each incremental economic data point and constantly changing positioning in an attempt to significantly outperform the market has not been a successful strategy on a consistent long-term basis. As we saw in September and October, while markets can rise and fall over shorter time periods, we believe our clients’ highest probability of success can be found using a disciplined asset allocation budgeted to equities, fixed-income, alternative investments, and cash with periodic rebalancing.
As always, if you have any questions or would like to discuss your accounts or financial situation further, please call your advisor directly or email us at email@example.com.
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