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November 2021 - Market update
Key Observations
- US stocks and bonds were relatively flat for the month of November.
- OMICRON: Emergence of the OMICRON variant added considerable volatility to the equities and energy markets toward the end of the month. When news of the variant hit the markets on Black Friday, we saw knee jerk selling across equities on what is typically a quiet day. Fears of renewed lockdowns and production shutdowns sparked new concerns of tempered growth and demand for oil. While scientists and researchers scramble to assess the potential impact of the variant, uncertainty continues to weigh on the market taking investors on a bumpy ride the last few days of the month.
- Inflation: The debate will continue over the pace of Fed tapering, focusing on whether inflation is truly temporary or whether it will continue well past the clearing of supply chain bottlenecks. By the end of the month, policymakers around the world finally began to openly raise concerns that inflation could pose an ongoing risk to households. In remarks to lawmakers on November 30th, Federal Reserve Chairman Powell “retired” the word “transitory” from the inflation discussion. The market reacted swiftly to those remarks on the probability that the Fed will raise rates sooner than anticipated. Bonds will continue to underperform if inflation causes rates to rise. Our Low Volatility Tactical portfolio is positioned for the effects of inflation and rising rates.
Dear Clients,
This is the first of our new Market Update format. We hope that this regular, longer-form note will provide timely information that will keep you updated on the key topics related to your investments and financial life. As always, we appreciate feedback.
Data Dashboard
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Stock Market
The US stock market experienced heightened volatility in the last few days of the month, causing the November return on the S&P 500 to turn negative on the last day of the month. Q3 earnings were stronger than expected, which supports the above-average valuations and a double digit return so far this year. Risks to growth from the Omicron variant spooked investors when announced on Friday, but it is still too early to know how much of an effect the newest variant will have on the US economy.
The Energy Sector has been the shining star of the US equity market this year, although oil prices have retreated in recent weeks as supply has been added to the market to combat higher prices. The Organization of the Petroleum Exporting Countries (OPEC) is meeting Thursday and will likely discuss that planned production increase, though there are whispers that the oil cartel will renege on their plan and keep production limits in place. OPEC’s incentive is higher oil prices, and so expecting them to add supply in a weakening oil market is suspicious.
International stocks have underperformed US stocks year-to-date. Lower vaccination rates and higher rates of inter-country travel have made re-opening many European countries difficult, causing slower recoveries. The supply chain issues we see as an importing country are just as difficult for exporting countries who are struggling to get their products to buyers in a timely manner. Higher cargo shipping costs weigh on exporters. The cost of shipping containers is still above $9,000 per 40ft container, compared to less than $2,000 pre-COVID.
Year to Date Returns (by US Sector)
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Bond Market
Broad bond indexes have produced negative returns year-to-date as interest rates have increased at all points along the yield curve. The 10-year treasury yield now sits at 1.44%, having fluctuated from the start of the year at 0.90% and hitting a high of 1.75% in March. Bond yields are sensitive to inflation which has burst to a rate of 4.6% (Core CPI) and is looking like it may remain persistent. Fed officials have announced the start of the taper process, and bonds are pricing in rate hikes starting in late 2022. Meanwhile, high-yield corporate bonds have benefited from strong equity markets, outperforming high-grade credit for the year.
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Economics
The US Economy has more than recovered from the shock to the system in March of 2020. Judging by key economic indicators (GDP, Unemployment, Investment), economic activity is very strong. There are a few key potential areas of concern as we head into December.
The global supply chain is still crawling and ships are still parked in the waters outside of key US ports. Those bottlenecks are expected to loosen as we head into the first quarter and will hopefully give the boost to activity as retailers are able to rebuild their inventories and meet the demand of consumers.
Unemployment has receded back to more acceptable levels (4.6%) after spiking to 14.8% in April of 2020. The labor force is structurally different Post-COVID. Workers are demanding greater flexibility and companies are struggling to find workers in their lower paying positions. The threat of persistent inflation will put pressure on employers to increase wages, and ultimately could cause a feedback loop that causes higher costs to be passed along to consumers.
Tactical Updates
For our Tactical Portfolios, we began and ended November with a majority weighting in domestic US equities and a smaller exposure to foreign equities. Throughout the month, we realized equity gains in Canada, Software/Tech, and the S&P 500. We closed positions in a nearly flat Communications sector and remain invested in a handful of consistent positions such as Commodities, Real Estate and Energy related companies.
Additionally, we saw intra-month changes in the relative valuation of TIPS, so we were able to realize a gain and consequently re-enter at a favorable position in our Low Volatility Tactical model. We remain concentrated in both High-yield Corporate Bonds and Treasury Inflation-Protected Securities.
General Client Considerations
December is a busy time and it can be easy to get caught up in the chaos. It can be tempting to “put it off until after the New Year,” but please don’t hesitate to reach out to us if you have any questions or have any changes in your life that warrant a conversation. We always have people here during business hours to provide the service you expect. You are not bothering us. This is why we are here.
In a year with strong stock market returns, it can be difficult to find losses to harvest. While we do not hold ourselves out as tax professionals, we can work with you and your accountant to execute your tax strategy. If you do not have an accountant and you have tax questions, let us know and we can help you find someone.
Also, this is a friendly reminder that IRA required minimum distributions are due to be taken by year-end. Please contact us if you have any questions regarding your RMDs.
Ryan Wheeler
Chief Investment Officer