by William Henderson, Vice President / Head of Investments
Equity markets began the year with a dose of volatility that was largely absent in 2021; with all three indexes selling off and U.S. Treasury yields rising leaving investors with few places to shelter from the storm. The Dow Jones Industrial Average lost a respectable –0.3%, the S&P 500 Index lost –1.8%, and the NASDAQ got walloped dropping –4.5%. All the news that was fit to print was bad for the markets and the headlines were dominated by the Fed and the release of the minutes from the December 2021 FOMC meeting. The minutes revealed a Fed not only willing to taper bond purchases and raise rates in 2022 but one also willing to begin some serious balance sheet management. This sent the yield on the benchmark 10-Year U.S Treasury higher by 40 basis points to 1.75%. The Fed’s attention to its balance sheet should not be considered shocking in our view as you look at how large balances have grown even since the Great Financial Crisis of 2008 and before the pandemic. (See the chart below from the Federal Reserve Bank of St. Louis.) 

Certainly, a Fed relying more heavily on balance-sheet reduction, which in turn removes liquidity from the market as the largest buyer of bonds slows its process, although this action alone may not be all bad for markets. With this action, the Fed could focus more on its balance sheet and less on rate hikes as a way of removing monetary stimulus. Lower short-term interest rates allow for a steeper yield curve (the measure of rates between short-term levels and long-term levels); which generally is good for financial firms and banks and therefore the overall economy.

Last week’s market moves were impactful, but this same movie played early last year, and Wall Street strategists prognosticated the great growth-to-value rotation in equity markets. Yet, by the end of the year, markets moved closer to parity and all three major indexes posted strong gains for the full year. Three times since the pandemic interest rates rose sharply in a brief time followed by a sell-off in growth stocks and the NASDAQ. (See the chart below from FactSet)  

Generally, the technology heavy NASDAQ sees higher rates as a headwind to upward performance. This is true because technology firms typically borrow more than established firms and therefore higher rates affect future performance, due to increased borrowing expenses. Besides the obvious relationship between rates and growth, this chart also shows that these selloffs tend to be brief and often create a window to buy technology and growth sectors at more reasonable prices.

2022 looks to be a year with more volatility and uncertainty than 2021. You will hear the phrase “All Eyes on the Fed” about 1,000 times this year as Wall Street tries to decipher the FOMC dot plots and tea leaves of Fed minutes and comments made by Chairman Jay Powell at his press conferences. It is understood that monetary policy whether in the form of higher rates, less bond purchases or balance sheet management must be adjusted to reflect recent strong inflation data and an unemployment level reaching 3.9%. Fiscal policy seems in flux as well, as President Biden’s Build Back Better plan flounders in Washington with each passing week. This leaves us with the consumer and the corporation to propel the economy alone. That’s not a bad picture when you consider both are very healthy with strong balance sheets, healthy cash positions and relatively low interest rates.  

This week we will get a good amount of economic data with inflation (CPI) coming out Wednesday, unemployment level on Thursday and retail sales and consumer confidence on Friday. “All Eyes on the Fed”?  We say all eyes on the consumer.

by William Henderson, Vice President / Head of Investments
Stocks ended the year on a mixed note with the broader markets posting modest gains while the technology-laden NASDAQ notched a barely noticeable loss. The Dow Jones Industrial Average rose +1.1%, the S&P 500 Index gained +0.9%, and the NASDAQ dropped –0.1%. Massive piles of cash in consumer coffers, corporate earnings hitting new records, and waning but still in place federal monetary and fiscal stimulus propelled markets to new records in 2021 and the patient investor was richly rewarded with double-digit full year 2021 returns in all three major market indexes. Year-to-date 2021, the Dow Jones Industrial Average has returned +21.0%, the S&P 500 Index +28.7% and the NASDAQ +22.2%. What made the returns in equities more palatable was that these returns were garnered with very little volatility. A brief look at the VIX (Chicago Board of Options Exchange S&P 500 Volatility Index), which measure stock market volatility shows that by historic measures the VIX in 2021 was calm. See the chart below from YCharts and Valley National Financial Advisors. There were very few spikes in the VIX above 25, and for most of the year, the index was modestly falling.   

During this record rise in stock prices, fixed-income markets, while selling off early in 2021, regained some composure mid-year and stayed relatively steady into year-end.  he 10-year U.S. Treasury opened 2021 at a yield of 0.91%, hit a high of 1.74% in March and then closed the year at 1.51%. While not a year for strong bond returns, for the few occasions in 2021 when risk assets sold off, it was important that smart investors held anchor positions in risk management assets like bonds. 

As mentioned, corporate earnings were strong, reflecting economic growth that was the strongest since 1984. (See the chart below from Factset.) 

The Fed successfully orchestrated a recovery from the pandemic-induced recession of 2020, which gave consumers the confidence to spend on everything from leisure activities to new homes and renovations to existing homes. While inflation became a concern along with supply chains disruptions, labor markets were hot all year and unemployment slowly fell to 4.2% as hiring continued across all sectors of the economy.   

As we look to 2022, there are headwinds and tailwinds to consider. While monetary stimulus will slowly get removed as the Fed reduces its bond buying and then moves to higher interest rates, fiscal stimulus could continue in the form of big policy spending like the Biden-proposed $1.8 trillion Build Back Better Bill. The consumer starts the year in excellent financial shape bolstered by strong increases in savings accounts and limited spending in 2021. Corporate balance sheets are also in excellent shape allowing firms to boost wages and hiring but supply chain disruptions and drastic increases in raw material costs pose dilemmas for corporate CEOs. Wall Street economists are modestly optimistic on 2022 with growth estimates for U.S. GDP averaging +3.0% which certainly provides a solid base that supports the continuation of the bull market.   Stay focused on the tailwinds while being aware of the headwinds and keep a long-term perspective on your investments and your financial plan. 

by William Henderson, Vice President / Head of Investments
A shortened Christmas Holiday week pushed markets higher even in the face of increased omicron variant threats and global travel snafus. The Dow Jones Industrial Average rose +0.2%, the S&P 500 Index gained +1.2%, and the NASDAQ gained a healthy +3.1%. Further, year-to-date returns remain well into near-record territory for 2021. Year-to-date, the Dow Jones Industrial Average has returned +19.7%, the S&P 500 Index +27.6% and the NASDAQ +22.2% giving us solid returns across all market sectors. With the healthy returns in risk assets, as expected, bonds sold off. The 10-year U.S. Treasury bond rose by nine basis points to close the week at 1.50%. The fixed income markets react as quickly as the stock market to good news or bad news and each market reminds us why investors own each asset class. Equities remain a portfolio’s return generator and bonds remain a portfolio’s risk management tool.   

As mentioned above, the week gave us mixed news on the pandemic and its impact on the U.S. economy and financial markets. Cases of the omicron variant spread rapidly in pockets of the country, and the government announced an initiative to distribute COVID-19 tests to the public for free. Lastly, regulators approved two new pills that will be available by prescription for those who are sick with COVID-19.  

In a revision to last quarter’s GDP, the U.S. government reported economic growth last quarter was slightly stronger than it had estimated previously. In its final estimate released last Wednesday, GDP growth in the third quarter was 2.3%, an upward revision from the original release of 2.1%. By comparison, GDP accelerated at annual rates of 6.4% and 6.7% in the first and second quarters of 2021, respectively. A report on Bloomberg showed that Christmas shopping, both in person “bricks and mortar” and online was much stronger than 2020. According to the report by Mastercard SpendingPulse, U.S. holiday sales jumped 8.5% from last year as consumers spent more money on clothes, jewelry, and electronics. Sales boomed across the board during the holiday season defined as November 1 to December 24. Many consumers were savvy shoppers and started earlier than normal, most likely due to widely reported supply chain concerns, which in the end, were largely unfounded rumors as most retailers were plentifully stocked with goods.    As we move into 2022, it is important to keep the markets in perspective. Certainly, central banks globally are taking a more hawkish tone and higher short-term rates are a given next year, but that information is already priced into equities. Two questions are typically bantered about: 1) Is the market going higher or lower today? 2) Is today a good day to buy (invest)?  And my answer to both questions is always the same – YES. Yes, the markets will go up or down today and YES, today is a good day to buy (invest). Long-term positive returns on investment portfolios are driven by long-term investment plans and a commitment to sticking to your investment plan. We’ve seen this all year as the market rallies back as quickly as it sold off. Perspective and commitment are what matter the most. 

by William Henderson, Vice President / Head of Investments
The markets digested a pile of negative news last week and reacted as expected, selling off by the week’s end with all three major indexes closing lower. The Dow Jones Industrial Average fell by -1.7%, the S&P 500 Index lost -1.9%, and the tech-heavy NASDAQ fell by -3.0%. Just last week we discussed hitting records by year end and then, as has been markets’ modus operandi lately, things whipsawed the other way when some new or semi-shocking news hit the tape. Thankfully, year-to-date returns remain healthy. Year-to-date, the Dow Jones Industrial Average has returned +17.7%, the S&P 500 Index +24.7% and the NASDAQ +18.5%. 

Last week the FOMC (Federal Open Market Committee) wrapped up its two-day meeting and did what the markets and economists had expected. It announced it will wind down bond purchases at a faster pace due to increased inflationary pressures on the consumer and healthy employment levels. However, there was a new “tone” in the Fed’s message that the markets read as hawkish – meaning higher rates are coming. The new outlook for rates in 2022 is showing as many as three rate hikes in the second half of the year. While not unexpected, the markets and the economy have become a little too accustomed to easy monetary policy. The chart below from Bloomberg shows how U.S. inflation, as measured by the Consumer Price Index, is higher than it has been in about 30 years, with dots indicating the timing of the Fed beginning to hike rates. The Fed’s hawkish pivot is typical behavior and standard reaction to a jump in inflationary pressures.   

The omicron variant of COVID-19 is having a much bigger impact on the markets and the economy than the expectation of higher rates. We knew higher rates were coming and we believed omicron was in check but, globally and in the United States, we are seeing renewed shutdowns and closures as the omicron variant spreads more rapidly than expected. Several Broadway shows and NFL football games were canceled over the weekend just as a sense of normality was returning. Closures and cancellations are not what the economic doctor ever orders for a recovery economy. Mall activity and shopping are at decent levels and consumers are spending for the Christmas holiday. Retail sales information will be telling when released next month. It is important to note that current vaccines when taken with the booster, deliver a powerful punch to the omicron variant and most hospitalizations and severe illnesses are among the population that has yet to get vaccinated. 

In our weekly Heat Map, we moved Fiscal Policy to neutral from positive because the Build Back Better bill looks to be dead for 2021 and questionable for 2022. If the Biden Administration cannot piece together a coalition to support his plan while in numerical control of the U.S. House and Senate, their future looks bleak, especially given 2022 is a mid-term election year. For that reason, we believe fiscal stimulus (support for the economy from the government rather than the Fed) will wane in 2022 and is no longer supportive of the economy. 
  

We do not want to be repetitive more than required but the negatives we point out above: omicron, Fed tapering, higher rates and removal of fiscal stimulus are not new worries. We have talked about and them for weeks and are well prepared. Stock markets can rally well into a Fed tightening cycle. The chart below from Bloomberg and Edward Jones, shows equity market returns, as represented by the S&P 500, during the two years following the first time the Fed began hiking rates in previous rate-hiking cycles over the last 35 years. 

Everyone knows past performance is not indicative of future performance, but we can learn from history and history shows us that stock markets can do well even as liquidity tightens and monetary and fiscal stimulus wanes. Last week, as equity markets fell, the bond market provided needed risk management for portfolios. The yield on the 10-Year U.S. Treasury dropped seven basis points from the previous week to 1.41% as investors moved from risk assets, such as equities, to the relative safety of bonds. With only a few trading days left in the year and news, but not “new” news hitting the tape every day, investors will be challenged and whipsawed as their investment plans are tested. We remain focused on the long term rather than the short term and believe that the economy remains well on its way to a strong recovery and a healthy 2022. 

by William Henderson, Vice President / Head of Investments
Last week the markets shrugged off Omicron-related news and strong November inflation numbers as all three major indexes closed higher. The Dow Jones Industrial Average jumped by +4.0%, the S&P 500 Index rose by +3.8%, setting a record, and the NASDAQ gained +3.6%. With fewer and fewer days left in the year, we are moving to close 2021 out with some near record levels on all three major indexes, giving us quite a year of overall returns. Year-to-date, the Dow Jones Industrial Average has returned +19.7%, the S&P 500 Index +27.2% and the NASDAQ +22.0%. As mentioned, the year-over-year CPI (Consumer Prices Index) for November was reported at +6.8%, the highest reading on inflation since 1982. This information gives Fed Chairman Jay Powell the ammunition needed to consider moving interest rates higher before June 2022, which was the previously telegraphed date. We will get some further direction this week at the FOMC (Federal Open Market Committee) meeting December 14-15. The 10-year U.S Treasury ended the week at 1.47%, seven basis points higher than last week and still below 1.74% level reached in March of this year. 

Chairman Powell will consider the Fed’s so-called “dual mandate,” 1) average inflation at 2% and 2) unemployment rate at 4.1%. See the chart below from Factset which shows we are nearing the point where both mandates are being met.   

It is likely that the FOMC announces a faster pace in their balance sheet tapering process. Currently, they are tapering (reducing purchases of bonds) by $15 billion per month; an increase to $30 billion per month is likely. At that rate, the Fed would wind down the tapering process by March of 2022, thereby allowing the start of the rate hikes, if needed. At any rate, we expect rate hikes to be clearly telegraphed, measured and incremental. 

A lot of noise is being made about rates hikes and the Fed “Hawkish Pivot,” meaning a Fed that will raise rates rather than keep them lower. Certainly, interest rates at the Fed’s current target range of 0.00 – 0.25%, are accommodative to economic growth, but interest rates at 100 or even 200 basis points higher are still considered accommodative by historical standards. We are not predicting huge interest rate moves like that, but it seems to us that higher rates are inevitable. When we look at the Fed’s last tightening cycle (December 2015 – June 2019), interest rates moved from 0.00% (post the Great Recession) to 2.50%. During the period, the S&P 500 Index moved higher by 57% (or 11% per year). Of course, past performance is never a preview of future performance, but we showed that data simply to prove that markets can move higher even while the Fed removes monetary accommodation.   

Lastly, even while the Fed begins to raise interest rates, we expect bonds to continue to offer investors an important risk management tool – critical to their portfolios. A look at the current U.S. Treasury 10-Year Breakeven Inflation Rate shows the level at 2.44% (Federal Reserve Bank of St. Louis). The breakeven inflation rate represents a measure of expected inflation derived from 10-Year Treasury Constant Maturity Securities and 10-Year Treasury Inflation-Indexed Constant Maturity Securities. The latest value (2.44%) implies what market participants expect inflation to be in the next 10 years, on average, well below the 6.8% inflation number released last week.   

Watch for retail sales data this week as we get our first glimpse of holiday shopping data. Further, early indications show supply chain issues are slowly getting worked out in West Coast ports as we showed last week with falling shipping rates (China to U.S.). The Omicron variant’s impact seems to have abated a bit in the U.S. while the opposite is happening in the U.K and elsewhere globally. The Fed and the Biden Administration have their hands full and will need to decide where, when and how to remove monetary and fiscal stimulus, both of which have powerfully and effectively fueled strong price inflation in goods and services. Wall Street trading desks will be thinly staffed for the next few weeks; so, watch for limited volatility but remain focused on your long-term goals. 

by William Henderson, Vice President / Head of Investments
All three major market indexes closed lower last week as a poor jobs report on Thursday added to hawkish comments by Fed Chair Jay Powell suggesting a more aggressive pace of bond purchase tapering and sooner rate hikes than previously announced. The market also continued to react to the implications of the new omicron variant of COVID-19. The Dow Jones Industrial Average fell by -0.9%, the S&P 500 Index dropped by -1.2% and the NASDAQ lost -2.6%. While a poor week overall, major indexes remain in positive territory for the year. Year-to-date, the Dow Jones Industrial Average has returned +15.1%, the S&P 500 Index +22.5% and the NASDAQ +17.8%.  Even in the face of potential monetary tightening, the U.S. Treasury market rallied and forced bond yields lower. The 10-year U.S Treasury ended the week at 1.40%, a full 13 basis points lower than last week and confoundingly lower than the 1.74% level reached in March of this year. Bonds continue to offer safety and risk management when risk assets (e.g., equities) sell off. 

As mentioned above, according to Bloomberg, the employment report showed only +210,000 new jobs were created in November 2021 vs. economists’ expectations of +550,000. On the surface this number is bad news, but this data point is sometimes unreliable and often subject to revisions in later months. If you unpack last week’s economic releases, we believe there is strong forward momentum in the employment situation and the economy. First, the unemployment rate plunged to 4.2% vs. expectations of 4.5%, clearly suggesting more people are returning to the workforce. Second, the Labor Force Participation rate moved to a post-pandemic high of 61.8%. (See the chart below from the Federal Reserve Bank of St. Louis). 

A report by Cornerstone Macro last week pointed to two articles that highlighted teenagers and retirees might be lured back to the workforce soon: “Teen Hiring is Snowballing Amid Staffing Crisis, Rising Entry-level Pay “(USA Today 12/1/21). And “Short on Transit Workers, Cities Pay Bonuses to Lure Back Retired Staff” (NY Times 12/1/21). (See the charts below from Cornerstone Macro showing significant improvements in average hourly earnings for employees in the Leisure, Hospitality and Retail sectors – all classic places for younger and / or newly retired workers.) 

Lower unemployment and wage growth will continue to act as an economic tailwind and propel the recovery farther and longer.   

While the impact of the new omicron variant is still being digested, the markets are not yet panicking. More specific information about omicron’s transmissibility, virulence and resistance to vaccines needs to be discovered. However, early reports suggest while more contagious, omicron has relatively mild symptoms and the widely available booster shots could offer a considerable degree of protection. Lastly, biotech and medical developments over the past year give us some degree of confidence that the latest setback will not lead to a repeat of the early-2020 pandemic days and resultant economic lockdowns.    As we move to the close of 2021, let’s keep the important things in focus: the economy is clearly on a path to a strong recovery, employment activity is healthy and growing broadly across all sectors, corporations remain strong and continue to invest in capital expenditure and finally the consumer remains the backbone of the economy and is poised to continue to offer support well into 2022. Market selloffs and setbacks are to be expected, especially at year end as trading desks are thinly staffed and investment banks are reluctant to offer liquidity. Here at VNFA, we are already focused on 2022 and long-term returns. 

by William Henderson, Vice President / Head of Investments The equity markets reacted negatively to the discovery of a new highly transmissible COVID-19 variant in South Africa. The announcement of a new strain, dubbed omicron by the World Health Organization, shocked markets and impacted most major sectors. The Dow Jones Industrial Average dropped by -2.7%, the S&P 500 Index fell by -2.3% and the NASDAQ dropped by -3.1%. However, all three major indexes remain in positive territory for the year. Year-to-date, the Dow Jones Industrial Average has returned +15.9%, the S&P 500 Index +23.9% and the NASDAQ +20.9%. The U.S. Treasury market reacted as expected to bad news, with prices rising on bonds, reminding investors why bonds remain an anchor in most portfolios – providing the needed risk management tool while risk assets are selling off. Last Friday, the 10-year U.S. Treasury briefly dipped below 1.50%, before settling in over the weekend at 1.53%, four basis points lower than last week and well below the 1.74% level reached in March of this year.

Last week, we talked about the VIX (CBOE Volatility Index – or measure of the market’s risk level) and how “calm” the VIX had been thus far in 2021. Well, add in an omicron variant, and the VIX spikes to a 10-month high. See the chart below from Bloomberg.

As of the writing of this article, the markets are already rebounding nicely, and many market prognosticators are calling it a “buying opportunity.” We often get that question: “Is this a buying opportunity?” Our answer is always the same: “YES!” If you are a long-term investor, with appropriate risk levels applied to your portfolio, every day is a buying opportunity as time generally smooths out peaks and valleys in the markets.

Certainly, this new COVID-19 variant puts the unknown element back into the markets, but we have seen this before with the delta variant and the pharmaceutical firms are already touting the need for another booster shot to deal with the omicron variant. Further, FED policy markets are well aware of the issue and resultant market and economic implications. This means that their announced monetary policy tightening, and bond purchase tapering could at any time be adjusted. In fact, trading markets are already pushing out their expectations of the first rate hike to July 2022 from June 2022.

Lastly, there seems to be an overall consensus gathering in Washington and Wall Street that the pandemic is becoming endemic and will be with us in some form or another for quite a long time. For each sector negatively impacted by lockdowns and new COVID strains such as travel & leisure, there are sectors that are positively impacted such as technology and bio-tech. There are a lot of economic indicators being released this week including data around retail sales, home prices and the labor markets. This information will give us needed information about the future of the economy, the direction of Fed policy and the sentiment and strength of the consumer. Inflation continues to be a concern and the question remains about which parts of inflation will be transitory vs. permanent.

Certainly, last week was a sell-off in all market sectors but we have talked about sell-offs occurring in every major bull market – so this is generally typical market behavior. However, over long periods of time, sell-offs are simply blended into long-term returns. See the chart below from JP Morgan showing performance of portfolios over time.

In any given single year, equities alone can produce a return of –39% and a blended portfolio of –15%. Looking out 20 years, both portfolios are in positive territory. Simply put – investing is a long-term activity.

by William Henderson, Vice President / Head of Investments
Last week saw a mixed market as the S&P 500 and the NASDAQ posted slight gains, but the Dow Jones Industrial Average sold off as industrial sectors such as materials, energy, and financials showed weakness. For the week’s end, the Dow Jones Industrial Average fell -1.4%, while the S&P 500 Index increased by +0.3% and the NASDAQ jumped by +1.2%. Across all major market indexes, year-to-date returns remain solid, pointing to a potentially record setting 2021. Year-to-date, the Dow Jones Industrial Average has returned +18.3%, the S&P 500 Index +26.7%, and the NASDAQ +25.3%. The 10-year U.S Treasury moved higher by two basis points closing the week at 1.57%, modestly below 1.74% level reached in March of this year. Strong inflation pressures are hinting that the Fed’s tapering of bond purchases may accelerate, and higher short-term rates could be sooner than mid-2022 as economists had predicted. 

With the Thanksgiving holiday this week, the House narrowly passed President Biden’s $1.75 trillion social spending bill, sending it to the Senate. It is widely expected that the bill will languish in the Senate for several weeks where further revisions will take place. The only important news out of Washington this week was President Biden’s nomination for Federal Reserve Chair, Jerome Powell, to serve an additional term. The race for this critically important post had come down to either keeping Jay Powell for an additional term or nominating Fed Governor Lael Brainard as his replacement. As we have said often, uncertainty is the one thing the markets really fear so keeping Powell on board soothed the markets. Brainard was nominated as Vice Chair. 

While inflation is running hot, and COVID-19 cases are rising outside of the U.S., the markets do not seem concerned. Look at the chart below from the Federal Bank of St. Louis showing the CBOE Volatility Index or VIX. The VIX measures the market expectation of near-term volatility conveyed by stock index option prices; essentially a quantitative way to measure risk, fear, and stress in the markets. The VIX is currently trading well below the “panic” levels seen at the beginning of the pandemic and arguably near its average trading level since 1990.   

The efficient market is seeing heightened capital expenditures by corporations, positive earnings strength, healthy bank balance sheets and a consumer poised to accelerate spending, hence a very low VIX reading. The markets are quiet but are they too quiet? Remember, pull-backs happen in every bull market, and we believe pullbacks are healthy for functioning markets. See the chart below from Clearnomics and Valley National Financial Advisors showing the performance of the stock market each year (bars) and the largest intra-year decline (dots) each year. The average drop in any year is -13.5% but the long-term average of the market is +9.0% each year, regardless of the pullbacks.  

Markets are efficient and volatility is a normal part of investing. The smart investor is rewarded for staying disciplined and remaining invested, especially during times of short-term market volatility. 

In the United States, the CDC announced that anyone over age 18 can receive a COVID-19 booster shot. This good news comes on the heels of rising Covid-19 cases in parts of Europe. Austria, for example, initiated a national lockdown and Germany said it may consider the same as new cases continued to surge. Certainly, rising COVID-19 cases anywhere, but specifically in the EU or U.S., will weigh heavily on the financial markets and will need to be monitored closely. This week is a shortened holiday week with the markets closed for Thanksgiving on Thursday and an early close on Friday. Watch for Wednesday’s economic releases including 3Q GDP, U.S. Federal Reserve Meeting Minutes, and weekly unemployment claims – all which could give signals to market movements through year-end and into 2022. 

Have a warm and family-filled Happy Thanksgiving.  

by William Henderson, Vice President / Head of Investments
U.S. equities sold off last week as a double dose of poor economic data hit the markets: inflation and consumer sentiment (more on that below). Last week, the Dow Jones Industrial Average rose fell -0.6%, the S&P 500 Index decreased by -0.3% and the NASDAQ dropped by -0.7%. Fortunately,  year-to-date returns across all major markets remain strong so last week’s modest sell off did not materially impact returns thus far in 2021. Year-to-date, the Dow Jones Industrial Average has returned +19.8%, the S&P 500 Index +26.2% and the NASDAQ +23.8%. The 10-Year U.S. Treasury moved higher by two basis points closing the week at 1.55% and still well below the 1.74% level reached in March of this year.   

As mentioned, inflation indicators released last week showed the economy continued to signal higher prices for many goods and services. Both the Producer Price Index (PPI) and Consumer Prices Index (CPI) came in well above economists’ expectations and reached multidecade highs. The CPI reading was +6.2%, the highest level since 1991, while the PPI reading was +8.6%, the highest level since 2010. Some economists shrugged the news off noting that the data was largely driven by “transitory” factors like energy and auto prices but other less transitory factors such as rent, and wages also showed significant price increases. The markets and consumers may not like higher inflation, but this is what the Fed ordered and remember, prior the pandemic for nearly 10-years, inflation had averaged a paltry +1.6%, well below the Fed’s mandated target of +2.0%. (See the chart below from FactSet).    

While inflation commonly hangs an anchor on consumption and growth, we expect higher inflation to moderate next year as supply chain disruptions, labor shortages and strong consumer demand eventually fall back to pre-pandemic, manageable levels. Further, the flexible or transitory components of inflation, energy, autos, and food, have been hardest from supply problems and should reverse once global pressures ease. However, the stickier parts of inflation such as wages, rent and healthcare are not likely to reverse, for example, it is usually very difficult to reverse salary increases, once implemented. If the Fed manages its mandate well, there will be a balance of prices between transitory and sticky that allow inflation to average their +2.0% goal.

One number released last week that is worrisome was U.S. Consumer Sentiment (previously called Consumer Confidence). The U.S. Consumer Sentiment, as measured by the University of Michigan unexpectedly fell in early November as Americans grew understandably concerned about rising prices and the inflationary impact on their finances. The University of Michigan’s preliminary sentiment index decreased to 66.8 from 71.7 in October. The November figure was well below all Wall Street Economists’ expectations according to a survey by Bloomberg which had called for an increase of 72.5. (See chart below from U Michigan and Bloomberg).

As we have stated many times, the consumer is the most important factor in the U.S. economy as consumption makes up approximately 68-70% of GDP in any given year. A worried consumer is not what an economic doctor would ever order. With the holiday season kicking off in about one week, or earlier if you believe TV ads, it will be interesting to see if the pent up, cash-flush consumer gets out there and spends money this year. If there is another twist to this story, it will certainly be what impact the supply chain disruptions and clogged ports will have on holiday shopping and Santa Wish Lists. From an investors point of view, a perfect hedge against inflation, and a way to protect one’s portfolio from the impact of rising prices is to invest in equities, which generally outpace inflation over time. 2021 is a perfect year to demonstrate this. While expert economists are crowing about the +6.2% inflation rate this year, the S&P 500 Index is up a stunning +26.2%. Always remain focused on the big picture.

by William Henderson, Vice President / Head of Investments
The first full week of November gave the markets a solid boost and moved to set up 2021 as a banner year for equity returns. Last week, the Dow Jones Industrial Average rose +1.4%, the S&P 500 Index increased by +2.0% and the NASDAQ moved higher by +3.1%. Year-to-date, the Dow Jones Industrial Average has returned +20.1%, the S&P 500 Index +26.6% and the NASDAQ +24.6%. The stock market shrugged off Fed Chairman’s Jay Powell’s commitment to begin tapering the Fed’s Treasury Bond purchases next month and to continue through June 2022. Normally, news from the Fed like that would have pushed interest rates higher but the reaction by the bond market (rates moved lower) simply showed that this information was fully priced into bond yields and Chairman Powell’s comments at his press conference were widely expected and previously well telegraphed. We have said it many times, that this Fed, under the direction of Powell, is one of the most transparent Feds we have seen. As mentioned, the 10-year U.S Treasury closed the week at 1.53%, down four basis points from the previous week and well below the 1.74% level reached in March of this year. Lastly, even after being pushed by reporters, Powell was reticent to discuss a concrete plan for higher interest rates next year. While expected, this comment reminded the stock markets that monetary stimulus, in the form of low interest rates, is going to remain in place for a bit longer. 

Chairman Powell reminded reporters that their dual mandate – inflation and jobs, remains front and center of their agenda and while we have seen inflation numbers well above their 2% target, full employment has not yet been reached. Clearly, last week’s jobs reports were strong as the report showed the U.S. economy added 531,000 new jobs in October, the most since July and the first upside surprise in three months. Prior months’ data was also revised higher, and hiring was broad-based across all sectors of the economy. (See chart below from Bloomberg.)  However, the report showed that despite solid growth in new jobs and wages, the labor participation rate held steady, and unemployment only modestly ticked down to 4.6%.   

We are definitely seeing inflation as strong demand for goods coupled with continued supply-chain disruptions and delivery bottlenecks persist, pushing prices for goods and services higher. One simple measure of inflationary pressures is to look at crude oil prices. A barrel of West Texas Intermediate crude (WTI) hit $84 last week, a post-pandemic high and higher than levels prior to the pandemic. (See chart below from Federal Reserve Bank of St. Louis.  Remember, crude oil is the base for gasoline, heating oil, and most plastics.   

It is important to keep things in perspective and remember that short-term trends are just that – short term. The economy is absolutely on a solid road to recovery with jobs being created and consumers and businesses in good shape financially. With low interest rates persisting, companies can continue to borrow at favorable rates giving them access to cash for capital expansion, workforce expansion and dividends. Banks, the engines of economic growth, love low borrowing costs which allow them to lend higher. Lastly, the consumer remains flush with cash, has a historically low debt burden and is pent up with demand for spending. These factors are the important things to watch and study. The stock market is a perfect predictor of inflation and we are seeing higher prices as a result of inflation in the economy, whether it is transitory or not. Stay focused on long-term trends. The Dow Jones Industrial Average is up nearly 95% since the bottom of the pandemic. (See chart below from the Federal Reserve Bank of St. Louis).   

Technology, whether Fin-Tech, Biotech or Real-Tech, will continue to improve and create efficiencies that the experts will fail to predict or understand, but the markets will always price into future expectations.