October recap and November outlook.
October Recap and November Outlook
October is usually considered one of the more volatile months – a history of market crashes tends to linger in people’s memories – but after opening with three days in which the market moved more than 1%, the equity markets mostly settled down to their usual upward trajectory.
The eventual size of the Build Back Better plan is still being debated, and the Fed continues to be very cautious as they digest ongoing data. The Beige Book, published in mid-October, showed that the economy is still expanding, despite disappointing employment numbers and the disrupted supply chain.
Let’s Look at Some Highlights
Inflation is Still the Story
The Fed’s preferred measure of inflation is “core” PCE, which the Bureau of Economic Analysis defines as personal consumption expenditures prices, excluding food and energy prices. September’s PCE number was the lowest observed rate since February, at 0.2%. Year-over-year, core PCE remained stuck at 3.6%, where it has been for the last four months. The downtick on the monthly rate in September exemplifies the Fed’s language of “transitory” inflation – despite the headlines, the data shows that the less-volatile components of the economy are swinging back, even if only slightly.
Wage and Price Pressure Continued
The U.S. Bureau of Labor Statistics data on average weekly earnings found that wages were up 4.5% year-over-year through September. This was echoed by the findings of the National Association for Business Economics (NABE) Business Conditions Survey, which found that 58% of respondents increased wages in the 3rd quarter, up from 51% in the July survey. In the Fed’s Beige Book, prepared in advance of the November Fed meeting, most districts reported “significantly elevated prices for materials as supply chain disruptions continued.” These increases were often passed along to consumers in the form of raised selling prices, indicating no reduction in the strong demand for goods in most sectors of the economy.
Businesses Are Still Betting on Growth The NABE survey found that businesses are also reporting increasing sales. Sixty-five percent of respondents to the survey reported that sales at their firms increased in the third quarter (Q3) of 2021. This appears to translate into confidence in the economy long-term, as businesses continue to invest in themselves despite higher wage and price costs. The U.S. Department of Commerce reported that core capital goods orders rose 0.8% in September, beating economist expectations for growth of around 0.4%.
The Fed’s Balance Beam is Turning into a Tightrope
Inflation is a sign that the economy is growing, and with wage growth keeping pace with prices, consumer pocketbooks are so far not feeling the pinch too badly. Business margins are getting squeezed, but while more and more businesses are revising earnings and mentioning margins, the market doesn’t appear overly concerned. The Fed will need to move very carefully and precisely to keep the intricate pas de deux between inflation and interest rates on smooth ground. Any stumbles could result in prematurely choking off the recovery.
Chart of the Month Real estate, and other real assets, are often seen as a way to help insulate a portfolio from inflation. But with home prices hitting record highs, investors may be concerned if we are in a real estate bubble that could have similar consequences to the global financial crisis in 2008. With consumer balance sheets in better shape and higher lending standards, an increased level of foreclosures isn’t currently being seen.
Monthly Mortgage Foreclosure Rate
The S&P 500 was up 6.91% in October bringing its YTD return to 22.61%
The Dow Jones Industrial Average rose 5.84% for the month and was up 17.03% YTD
The S&P Mid-Cap 400 increased 5.82% for the month resulting in a 21.13% YTD return
The S&P Small Cap 600 lost 3.36% in October, putting the YTD return at 23.02%.
Source: All performance quoted from S&P Dow Jones Indices.
All 11 sectors of the S&P 500 gained during the month. Consumer Discretionary did the best, adding 10.91%. Consumer Staples was up 3.71%. Energy was close behind, as it gained 10.18% for the month and is up 52.44% YTD. As a comparison point on volatility, in 2020 there were 109 days that posted a 1% move, 64 up and 45 down. Year-to-date in 2021, there have been only 42 moves of at least 1%, 26 up and 16 down.
The Treasury yield curve flattened throughout the month, with the 30-year Treasury ending up 11 basis points lower at 1.93% as of October 29th. The 10-year Treasury ended up higher at 1.56% but pared back gains by 8 basis points in the last week of the month. Short-term rates increased, with the 2-year and the 5-year Treasury ending at .50% and 1.19%, respectively. Positive economic data and rising consumer sentiment, as reflected by the University of Michigan survey, belied a disappointing 2.0% third quarter GDP reading. It’s important to note, the GDP number is really only disappointing in relation to the 6.7% reading in the second quarter. It’s still growing, if somewhat slower. Year-to-date the major fixed income sectors are still in the red, except for municipals. But they’re just squeaking by at .50%.
The Smart Investor
With so many moving parts affecting so many areas of the markets, we continue to focus on our core investment philosophy that emphasizes careful consideration of the assets in portfolios. The old adage of knowing what you own and why you own it rings even more true today.
As we enter the holiday giving season, it’s a good idea to make sure you’re keeping as much of the market’s gifts this year as possible. This means tax planning. The strong market has likely pushed asset allocations over their limits, and the gains have not been even; there are likely to be some winners and some losers that you can harvest to offset gains as you get your portfolio back to your preferred risk tolerance.
There’s also still time for charitable giving, whether you make a qualified charitable deduction that can count as your required minimum distribution, or you set up a strategy to gift appreciated assets in a donor-advised fund or transfer them to a trust.
And finally, there’s a reason you’re seeing Roth conversions in the headlines. With taxes poised to go up, this strategy may help you keep more of your assets growing throughout your retirement and may give you more control over your income.
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