Stock Market Tide Lifted Many, But Not All, Boats
Approximately two thirds of S&P 500 companies have reported third quarter earnings as of this writing, and once again the results are more positive than expected. Less than half of those companies meet our criteria to be included on our “buy list” of stocks at any given time and approximately 15% are companies heavily researched by our investment team as “core” positions likely to be held in client portfolios, based upon their unique investment objectives. Each quarterly earnings report of these core holdings (along with other companies of interest from our buy list) are researched, documented, and discussed by our team on a weekly basis during earnings season. For this reason, our research analysts and portfolio managers have read and heard the phrase “supply chain bottlenecks” cited by company managements enough over the past few weeks to last a lifetime. Be that as it may, it is an important dynamic requiring appropriate attention.
Companies tempering forward guidance based on these concerns have been bid down by investors while those with rosier outlooks have been rewarded. Masked by a strong rally lifting all sectors of the market in October is this dichotomy of winners and losers. For example, the dispersion of returns for mega-cap technology stocks hit a ten year high last month. In times when tides may appear to be lifting all boats, a thorough understanding of individual company’s unique challenges with similar problems (labor shortages, wage pressures, supply chain disruptions) can be key to identifying attractive investment opportunities.
|Market Index Returns||October 2021||YTD 2021|
|S&P 500 Index||7.0%||24.0%|
|Russell 2000 Index||4.3%||17.2%|
|MSCI EAFE Index||2.5%||11.0%|
|Barclays US Agg. Bond Index||0.0%||-1.6%|
|FTSE 3 Mo. T‑Bill Index||0.0%||0.0%|
Stock Market Review & Outlook
Major U.S. Stock Indices Recovered from a September Slump to New Record Highs
U.S. equities were quick to reverse course from the pullback in September, closing out the latest month with the strongest returns since November of last year. The S&P 500 hit a remarkable 59th closing high record of the calendar year to end the month of October 7% higher than it started. The NASDAQ Composite was equally strong, ending the month in new record territory and higher by 7.3%. A diverse group of S&P sectors outperformed the broad index return, with Consumer Discretionary, Energy, Information Technology, Materials and Financials the strongest. Stocks outside the U.S. did not keep pace.
The yield on the bellwether 10-Year U.S. Treasury Note closed the month 7 basis points higher at 1.56% after peaking at 1.70% mid-month. Bond traders perhaps realized that intermediate term rates had gotten a bit ahead of themselves following speculation that the Fed may be more active on tightening than their messaging implied. We continue to believe the Fed will stick to its plan of being data dependent and is unlikely to move short-term rates until well into next year.
|S&P 500 Sector Returns||October 2021||YTD 2021|
Economic Review & Outlook
Third Quarter Economic Growth in the U.S. Cooled
The first estimate of third quarter Gross Domestic Product (GDP) grew at an annualized pace of 2.0%. This is on the low end of the estimated range and (as expected) well below the unrevised 6.7% in Q2. Personal Consumption growth slowed considerably to 1.6%. Services were a lone bright spot, higher by 7.9%. Declining auto sales due to semiconductor chip shortages were a key detractor, reducing growth by -2.3%.
It is clear to see the effects of inflation at the gas pump and in the grocery store. The year-on-year consumer price increases have been substantial, but fortunately the rate of monthly change has moderated significantly in the past three months relative to the prior three-month period, particularly in the Core reading excluding the volatile food and energy segments. Consumers braved higher prices and barren shelves well enough to boost the latest reading of Retail Sales from September to a higher-than-expected level of 0.7%, while the prior monthly reading was revised upward as well.
Chart of the Month
It Will Take Some Time for Year-on-Year Inflation Comparisons to Pull Back
Economists “predicting” that elevated levels of annualized core inflation readings will be around until well into next year are correct, even if the more muted monthly figures we have experienced for the past few months persist. It is, however, not so much a prediction as it is math, as shown in the chart above. Monthly inflation that is on track with the Fed’s target will take until mid-year 2022 to show in the annualized data given the “base effect” of the large spikes in mid-year 2021.
Please reach out to one of your Account Officers or any member of our Executive Leadership Team to discuss topics raised in this letter or anything else we can be helpful with.