Wednesday, December 1, 2021
U.S. and International Equities
Equities finished November mixed as the S&P 500 and the Dow Industrials finished lower while the Nasdaq Composite gained over 0.3%. Investor concerns surrounding the potential impact of the Omicron COVID-19 variant on the economic outlook weighed on sentiment.
Developed international market (MSCI EAFE) and emerging market (MSCI EM) stocks reversed course from October in November, finishing the month lower. Concerns about an increase in COVID-19 rates in Europe, China property giant Evergrande’s solvency, along with the Chinese regulatory crackdown played a role in overseas investor decision making.
Growth names performed well in November as the growth-oriented Information Technology sector outperformed all other sectors. As interest rates declined, the value of the technology sector’s discounted future cash flows increased, causing technology stocks to do well. Moreover, the Omicron virus’ emergence caused money to shift over to technology names such as the stay-at-home stocks given the threat of the economic reopening potentially being delayed.
“While COVID-19 variants are the news of the day, some downside activity in November was perhaps not surprising given robust activity in October,” explained LPL Research Senior Vice President and Director of Research Marc Zabicki. “We continue to believe a modest holiday rally could materialize, especially if COVID-19 fears subside again. Meanwhile corporate earnings and economic numbers are still providing a foundation, in our view.”
Earnings, Earnings, Earnings
Earnings have been quite exemplary considering the challenges companies are facing as supply chain disruptions and materials and labor shortages affect the global economy. As we conclude quarterly reporting season, earnings are tracking to an almost 40% year-over-year increase for the third quarter, 12 percentage points above the October 1 consensus estimate. On average the largest upside surprises came from the energy, financials, and healthcare sectors.
Commodities Sell Off in November
Both natural gas and oil have had an outstanding year, gaining over 75% and 35%, respectively on the back of higher demand and improving economic conditions. However, both commodities and the energy sector pulled back in November as recent weekly inventory data has shown a greater supply build than anticipated. Moreover, the major metals reversed course in November as investors became increasingly concerned about the economy given an increase in worldwide COVID-19 cases.
Higher Rates Weighed on Fixed Income Returns
The benchmark Bloomberg Barclays U.S. Aggregate Index finished higher in November as some investors sought refuge in Treasuries and government-related bonds when stocks sold off late in the month amid COVID-19 variant fears. High yield bonds (Bloomberg High Yield Index), which have been a bright spot this year, sold off pushing their yields higher for the second straight month. International bonds finished the month mixed as developed international bonds (FTSE World Government Bond Index) gained ground while emerging market bonds (JP Morgan Emerging Markets Global Bond Index) declined.
U.S. Economic Data Recap
Inflation: Overall, consumer prices increased for the eighth straight month in October. The headline Consumer Price Index (CPI) increased more than expected to over 6% on a year-to-year basis. Removing volatile food and energy prices, the September Core Consumer Price Index increased by over 4.0% on a year-to-year basis, which was also higher than economists’ expectations.
The PPI increased over 8% year-over-year in October, which, according to the Labor Department, was the fastest annual pace since the federal government began calculating PPI. September core producer prices, excluding food, energy, and trade services, increased 6.2% year over year.
U.S. consumer: The Conference Board’s Consumer Confidence Index increased in October even as COVID-19 concerns, along with higher inflation (especially rising gas and food prices), weighed on consumer sentiment. However, the University of Michigan consumer sentiment survey fell again in November to a ten-year low as many Americans remain concerned about rising prices across many consumer markets.
Retail sales: Following August and September’s better than expected readings, October retail sales beat economists’ expectations, doubling September’s month-to-month increase. On a year-over-year basis sales rose over 16%. The past three monthly retail sales reports show that consumer spending was resilient in the wake of the Delta variant along with supply chain issues.
U.S. home sales: Following September’s increase, October home sales rose month over month, but were lower compared to a year ago. The improving job market can be credited for October’s demand amid higher mortgage rates from the start of August to September along with over 10% less supply compared to a year ago. The median existing home price sold in October came in just over $353,000.
Small business sentiment: The National Federation of Independent Business (NFIB) Small Business Optimism Index declined slightly in October compared to September as small business owners remained pessimistic concerning short-term business conditions. Unfilled job openings remain an issue with small businesses, while supply chain disruptions continue to provide challenges. Moreover, price increases among small businesses have reached levels not seen in approximately 40 years.
Federal Reserve (Fed) news: Minutes from the November Federal Open Market Committee (FOMC) meeting expressed increasing concerns about inflation and suggested the Committee would not hesitate to act should inflation come in higher than expected. Moreover, the FOMC said that given the economy’s progress they would reduce bond purchases by $15 billion a month, including $10 billion in Treasuries and $5 billion in mortgage-backed securities. The statement said the schedule would be maintained at least through December and will, most likely, continue going forward until the program wound down which could be in late spring or early summer of next year.
U.S. employment: The U.S. unemployment rate has declined substantially from last year’s peak near 15% to 4.6% in October. That being said, the labor force participation rate is just below its long term average of over 62%. With the number of open jobs available at over 10 million as of the end of September and firming labor demand, higher wages could be expected, which may put upward pressure on goods and services prices.
The economic recovery has continued even as the battle against COVID-19 and its variants continues. Strong earnings have been an important driver of this year’s strong stock market performance. Companies’ ability to successfully absorb higher input costs and pass them onto their consumers will play an important role in future earnings results and also the equity markets amid persistent supply chain challenges.
We believe that inflation is proving stickier that anticipated. However, it should stabilize once the economy completes its reopening, when supply chains are fully operational, and labor shortages ease. The mitigation of the Delta variant worldwide, and containment of the new Omicron variant, will be critical factors in determining the economy’s trajectory for next year. In over view, favorable seasonality, a very healthy consumer, a solid backdrop for continued steady growth in corporate profits, low interest rates, and the tools we have to fight COVID-19 position equities to deliver additional gains over the year end.
This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.
References to markets, asset classes, and sectors are generally regarding the corresponding market index. Indexes are unmanaged statistical composites and cannot be invested into directly. Index performance is not indicative of the performance of any investment and do not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results. All market and index data comes from FactSet and MarketWatch.
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