This blog will serve as follow up to our previously released Q4 Investment Themes and is intended to provide an update on what we are seeing as well as our current outlook.
Here are the top three things we are covering in this week’s blog:
- The market jumped across the board as fears over spiking interest rates and renewed COVID shutdowns began to cool.
- While the labor market continues to improve on paper, many unemployed people are likely unaccounted for with the expiration of benefits.
- Even as the employment situation improves, many other economic indicators have begun to show signs of slowing.
Market
Coming off the worst month since March 2020, all the major market indexes rallied in October. Fueled by strong earnings and a continuously improving employment picture, the market pushed through fears of rising interest rates in route to yet another all-time high. However, concerns do persist with the measured inflation rate beginning to spike and some key economic indicators slowing. Nonetheless, the S&P 500 showed a strong rebound from the lows of September, finishing the month +6.91%[1].
Despite struggling to begin the month, the Nasdaq 100 quickly recovered and surged higher to +7.90%[2]. This represented the largest return of all major indexes and set the tone for strong gains across the market.
The Dow Jones continued to grind higher and finished the month +5.84%[3]. After starting 2021 very strong, the Dow has since shown a relative under performance and continues to lag the more growth weighted indexes.
After a poor Q3, the Russell 2000 bounced a modest 4.21%[4]. While this was a step in the right direction for small caps, the lack luster performance over the past six months has dramatically diminished the early gains.
On a larger scale, the World index followed a similar trend in October and finished +5.59%[5]. While many of the global economies are still recovering from the impacts of COVID shutdowns, the index has surged higher.
After outperforming during Q3, commodities rallied further throughout October[6]. With the Federal Reserve now transitioning away from a “transitory” classification on inflation, we will be watching closely for any indication of 1970s style stagflation.
Gold continued to rally off the previous lows and finished the month above $1,800 an ounce[7]. This was a positive recovery for Gold as it attempts to stabilize amongst a spike in interest rates.
With inflation surging well above pre-pandemic levels, interest rates shot higher to begin October before falling to a near flat close[8]. Nonetheless, the 10-year yield has caused panic amongst investors throughout 2021 and will be a critical indicator moving forward.
Economy
Total Unemployment Insurance Claims fell further in October to slightly below three million[9]. This number is roughly double the normal “pre-pandemic” level for total claims. While the decrease in claims is a positive sign, the main catalyst is the expiration of unemployment benefits. This means that many people likely remain unemployed and are not being accounted for in this reading.
Since spiking to historic levels in March 2020, new claims for unemployment have continuously fallen and now sit just above pre-pandemic levels. This week’s reading of 281,000 is the lowest level of claims since March 14, 2020 and shows just how far we have come during that span. Similarly, continuing claims fell to a new pandemic low of 2.24 million in October. This represents a fall of over 200,000 from the previous week and over 5 million from the prior year[10].
After spiking to 12.23% in Q2, YoY GDP is expected to come down slightly in future quarters. Nonetheless, we anticipate the continued economic reopening to support higher than pre-pandemic levels of GDP for at least the next year. This elevated growth has helped to justify large market returns over the past year.
As is evident to most consumers, YoY CPI remains well above pre-pandemic levels and is expected to increase in future quarters. This has supported stock market growth in the short term but could begin to wreak havoc if inflation gets out of control[11].
YoY Pending Home Sales fell sharply for the second straight month in September to -8.04%[12]. While this may have been caused by the slight increase in interest rates, we also are likely seeing the effects of the quick recovery in the housing market after the initial economic reopening.
Another concerning data point has been the crash in consumer sentiment, which fell again in October to 71.70 and remains near 10-year lows[13]. The major risk here is that while consumer sentiment is now below the levels seen at the bottom of March 2020, the market remains at all-time highs. As a result, seemingly small unforeseen events could cause this disconnect to correct and lead to major losses in the market.
Summary
- After sustaining large losses in September, the market bounced back during October on the back of strong leadership in tech.
- Concerns persist with many of the YoY economic data readings beginning to slow, inflation continuing to accelerate, and the further disconnect between stocks and consumer sentiment.
- While market participants have enjoyed a huge bull run over the past 1.5 years, many economic and political concerns lie in the months ahead. For this reason, we have begun shifting our Konvergent investment philosophy to an All-Weather approach that is designed to perform in all market environments.
We hope you have enjoyed getting a deeper look into our investment research and look forward to providing this to you each quarter going forward. Thank you from the entire Konvergent Team!
[1] Slide 3: October Review – S&P 500
[2] Slide 4: October Review – NASDAQ 100
[3] Slide 5: October Review – Dow Jones
[4] Slide 6: October Review – Small Caps
[5] Slide 7: October Review – World Stock Market Index
[6] Slide 8: October Review – Commodities
[7] Slide 9: October Review – Gold
[8] Slide 10: October Review – US 10-Year Yield
[9] Slide 12: October Review – Total Claims
[10] Slide 13: October Review – Unemployment Crisis
[11] Slide 14: October Review – GDP & Inflation
[12] Slide 15: October Review – US Home Sales
[13] Slide 16: October Review – Consumer Sentiment