Market Recap: New high in October—what drives the overall market?
Following a modest sell-off in September, stocks racked up a big gain in October, with the Dow Jones Industrial Average and the S&P 500 Index setting new highs late in the month, according to market data provided by the St. Louis Federal Reserve.
The S&P 500 turned in its best monthly performance of the year, while the Dow managed its best return since March.
|Dow Jones Industrial Average||5.8||17.0|
|S&P 500 Index||6.9||22.6|
|Russell 2000 Index||4.2||16.3|
|MSCI World ex-USA*||2.9||10.2|
|MSCI Emerging Markets*||0.9||-2.1|
|Bloomberg Barclays US Aggregate Bond Total Return||0.0||-1.6|
Source: MSCI.com, Bloomberg, MarketWatch
MTD: returns: September 30, 2021-October 29, 2021
YTD returns: December 31, 2020-October 29, 2021
*in US dollars
While October’s rebound is encouraging, please remember to stay focused on your longer-term goals. Stocks have historically had a long-term upward bias, but they don’t move in a straight line, no matter how positive the economic fundamentals may be.
Be that as it may, 2021 has been a very good year for investors, as the table of returns above illustrates.
For the layperson, viewing the multiple highs we’ve seen this year can spark questions. One may ask, “Why are stocks performing so well? Aren’t we still in a pandemic? Isn’t inflation a concern? Aren’t we facing economic and political challenges that should derail the rally?”
All are good, fair questions.
But various metrics that investors collectively follow vary from what the casual observer might be more attuned to. Let’s look at three variables that have played an outsized role in this year’s rally:
- Economic growth
- Profit growth
- Interest rates
These have all been strong tailwinds for stocks.
Economic growth slowed in the third quarter, but overall, it has been strong this year. Economic growth by itself might not be an important variable, but economic growth powers profit growth. And investors are very attuned to what happens with profits.
The pandemic has created enormous economic distortions that have benefited some sectors at the expense of others. Overall, however, the economic rebound has fueled a substantial increase in earnings this year, according to Refinitiv, and that has aided equities.
Notably, October’s strong performance was closely tied to another quarter of much-better-than projected Q3 profits (Refinitiv).
Think of it like this. If you find a small business that you might want to purchase, you’d examine many aspects, but current profits and expected future profits would play a big role in the final purchase price. The same line of thinking holds true for publicly traded companies.
Let’s add one more variable to our recipe: interest rates. Interest rates and bond yields are at very low levels. Without jumping deep into the weeds of time-tested academic research, low interest rates leave savers with fewer options. In turn, that makes stocks more attractive to savers.
If you read this newsletter regularly or have worked with me, you know that I don’t believe it is possible to accurately forecast short term market moves. Having said that, this is a historic bull market we’ve been experiencing, and we’re due for a correction of at least 10%. Obviously, that did not happen in October, as favorable economic fundamentals countered September’s uncertain mood.
Yet, risks never completely abate, even if they are overshadowed by favorable developments. Inflation is still a worry, and investors now expect a faster pace of rate hikes from the Fed, according to a [[https://www.cnbc.com/2021/11/02/investors-expect-a-faster-pace-for-fed-rate-hikes-cnbc-survey-shows.html recent CNBC survey]].
Even if the Fed were to go ahead with one or two quarter-percent rate hikes next year, the fed funds rate would remain near historic lows.
A Season of Gratitude
As I draft this month’s newsletter, Thanksgiving is rapidly approaching. It’s been a bittersweet year here. Business has been good, and it’s been another terrific year working with clients. But my mother passed away earlier this year, which obviously makes me reflect and think about her life. We were so lucky to have her in our lives for many reasons. But most pertinent to our efforts here, she taught me much about the practical side of life: how to handle debt, how to stretch a dollar, and how to live well no matter what one’s income might be. She was a joy and wonderful guiding light.
I hope you all also have much to be grateful for this year at a personal level. While I know we all appreciate the terrific markets we have enjoyed, money is not the most important thing in this life. Its only real power is how it can manifest itself in enabling us to realize our potential and share with others.
Please know that this year, as in previous years, we have contributed 10% of profits to the NAPFA Consumer Education Foundation (https://www.napfa.org/ncef-home-page). NCEF provides pro bono financial planning financial planning services to those in need, including Building Homes for Heroes, which works with veterans to ensure they are financially prepared for home ownership. This is one way of paying forward the support you have given us.
Holiday Office Hours
We are closed the week of Thanksgiving, and will also be closed between Christmas and New Year’s. This will give us a chance to not only take a break, but to prepare for the year ahead.