November 3, 2021 ▫️ Market Update
Equity markets shook off September’s drawdown, with the S&P 500 notching another all-time high at the end of October — returning 7.01 percent in the month and up 24 percent for the year.
While Mid- and Small-Caps lagged in the U.S., they outperformed international markets by a considerable margin as currency impacts weighed on emerging markets.
With just over half of the S&P 500 having reported second-quarter earnings, companies have posted strong results, with the rate of companies beating estimates well above averages. Despite a few high-profile misses from Amazon and Apple, if earnings seasons continued to beat forecasts, it would be the fourth-highest rate of beating estimates since 2008.
Fixed-income markets attempted to digest disappointing economic data, persistent inflation, and a likely imminent Fed announcement on tapering. However, despite these headwinds, the U.S. fixed-income market was essentially unchanged for the month. Also, the yield curve flattened, which helped long-term bonds gain 1.63 percent.
Third-quarter GDP missed expectations with the U.S. economy expanding at a 2.0 percent annualized rate, compared to economist expectations of 2.6 percent.
In the last quarter of 2021, there are reasons to be both optimistic and cautious. While concerns over the delta variant, inflation, supply chain disruptions, and labor shortages remain, low-interest rates and solid corporate earnings provide a foundation of support for equities, and earnings are expected to grow double digits again.
Moving into November means we’ve successfully navigated the trickiest period of the year. September and October are often when markets wobble. However, this year they held onto their gains and remained at or close to all-time highs in some instances.
However, the U.S. economic recovery slowed sharply in the third quarter, as employers struggled to find workers, consumers battled with rising prices, and products remained stranded at ports. And there’s little hope that the supply chain issues will work themselves out anytime soon.
There are also signs that inflation may be more tenacious than initially expected. We don’t believe a return to 1970s-style inflation is likely. Still, there is a scenario in which persistently sharp price increases could be a factor to reckon with — and that the market might periodically reflect investors’ unease. Yet continuing to conceal a list of things to worry about are record stock market levels.
Statistically speaking, we think it’s okay to have a little bit of risk on — even if there’s some volatility associated with it. We believe the markets will accelerate on the heels of good economic data and strong earnings from major companies.
While it looks like volatility will be back — we expect the Fed to announce tapering — they communicated changes to expect with its bond-buying program. The Fed is currently spending $120 billion a month buying bonds but is expected to start a $15 billion a month reduction until it stops completely halfway through 2022.
Do we expect some volatility from tapering? We do. But the primary goal of tapering is to shock the market a little bit. But if history repeats itself, the volatility will be pretty limited for a short period.
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