November 06, 2021

Monthly Market Summary – October 2021

Global equity markets regained their upward momentum in October and rebounded from the September declines.  U.S. stocks led the way with the S&P 500, Dow Jones Industrial Average, and Nasdaq indices all setting multiple new record highs during the month.  Strong earnings, along with positive outlooks for future earnings, were the main driver for the gains in global equity markets.  In the U.S., about 80% of companies that have reported third quarter earnings beat analysts’ forecasts despite higher input, labor, and transportation costs, and supply shortages.  Investor confidence was also boosted by the general downtrend in new COVID cases and the continuing removal of restrictions, despite a few outbreaks leading to closures in Russia, China, and the United Kingdom (UK).  In addition, economic reports mostly pointed to continued growth, even if the rate of growth may be slowing after the initial rebound after COVID shutdowns.  Commodity prices moved higher on strong demand.  The fixed income markets were mixed as inflation measures reached multi-year highs.

Key economic news in October included third quarter gross domestic product (GDP) numbers.   U.S. GDP was lower than expected at 2% annualized growth, down from 6.6% in the second quarter.  China’s GDP was also lower than expected at 4.9% hurt by power shortages and new COVID-19 restrictions.  Economic growth was stronger than expected in Europe at 2.2%.  The labor market continues to be tight.  The U.S. unemployment rate dropped to 4.8%.  However, non-farm payrolls rose by only 194,000, which was lower than expected.  The number of job openings is still elevated at over 10 million.  The shortage of labor is pushing wages up.  That is one reason inflation measures remain high.  The U.S. consumer price index (CPI) rose 5.4% on a year-over-year basis, which was the largest annual increase since 2008.  Inflation is high around the world.  For example, the CPI for the European Union increased to 3.4% and was 3.0% in the UK.  Supply chain disruptions are an increasing problem.  Manufacturing powerhouse Germany is an example.  Industrial production in Germany declined 4% in the latest report, which was the largest decline since the March 2020 pandemic shutdowns.

Major U.S. equity market indices posted robust returns in October.  Large company stocks outperformed smaller company stocks.  In a reversal of results from the prior month, growth stocks outperformed value stocks in the large, mid, and small-capitalization (cap) indices.  All 11 industry sectors in the S&P 500 and Russell MidCap indices had a gain for the month.  In the Russell 2000 index of small company stocks, nine of the 11 sectors had a gain with only consumer staples and healthcare posting a small negative return.  Energy was again the performance leader in the mid and small-cap indices and had the second-best return in the S&P 500 index.  The consumer discretionary sector was the top performer in the S&P 500 index boosted by steep gains for auto related and retail stocks.

The MSCI EAFE index of developed international equities ended the month with a return of 2.5% and the MSCI Emerging Markets (EM) index had a gain of 1.0% on a U.S. dollar basis.  Local currency returns were slightly lower.  Just as in the U.S. indices, growth stocks outperformed value stocks in both the EAFE and EM indices.  Sector returns were varied by index.  In the EAFE index, the utilities sector had the best return while in the EM index consumer discretionary was the top performer.  Communication services had the lowest return in the EAFE index while healthcare was the laggard in the EM index.  On a geographical basis, among developed international markets, the Far East region underperformed the European and Pacific ex Japan regions due mainly to the decline for the Japan index.  Japanese equities moved lower on worries about potential policy changes by the new Prime Minister and on a decline in exports.  Among emerging markets, the Latin American region was down sharply again led by large declines for Brazil and Chile due to political issues and inflation worries.  Important export markets of Korea and Taiwan were also performance laggards.  Indonesia and emerging European countries had the best returns.

U.S. bond market sector returns were mixed for October.  Long-term bonds and inflation protected securities had the highest positive returns while short and intermediate Treasury and corporate bonds posted small negative returns.  Short-term yields moved higher (and prices lower) in reaction to signs that higher inflation may not be as transitory as central banks expect as energy prices continue to trend higher and supply and labor shortages persist.  The 10-year U.S. Treasury bond yield moved up to as high as 1.69%, a seven-month high, before retreating to end the month at 1.55%.  Mortgage-backed and municipal bond indices had small negative returns.

The Bloomberg Commodity index generated a return of about 2.5% for the month.  The agriculture, energy, industrial metals, and precious metals sub-indices all posted gains as demand remains strong and inventories tight.  The petroleum sub-index was the performance leader with a gain of almost 9%.  The price for West Texas Intermediate crude oil rose 10% during the month, setting another multi-year high.  The industrial metals sector was also a performance leader boosted by copper that rebounded after a pullback in the third quarter as China increased imports of the metal.  The precious metals sub-index gain was mostly due to the double-digit gain for silver.

Vogel Consulting, LLC (Vogel) Tactical Recommendations

Much of the initial sharp rebound from pandemic restrictions and shutdowns is likely past.  Even though growth rates are likely to be lower going forward, there are factors that are supportive for continued positive economic and earnings growth.  Historically low inventory levels that need to be replenished, strong demand for labor, still low interest rates, the need for capital spending to offset labor shortages and supply chain disruptions, and high levels of liquidity in the economy are a few of the key positive factors.  There are risks that could dampen economic activity and the outlook for corporate profits.  For example, inflation, supply shortages, and labor shortages which are disrupting many industries and companies around the world are expected to continue well into 2022.  Central banks and governments around the world are starting to move toward reducing stimulus measures since economies have been reopening and inflation has been rising.  Therefore, we continue to prefer to have a diversification of exposure to sectors benefiting from secular growth trends along with some exposure to cyclicality to participate in economic growth.  Within the equity allocation, we recommend an equal weight position relative to long-term targets to U.S. large-cap, mid-cap, and small-cap stocks, as well as to developed international and emerging market equities.  Within our fixed income recommendation, we continue to favor short to intermediate maturities.  We continue to recommend an underweight allocation to hedge funds.  We recommend keeping at least a year of cash reserves to avoid having to raise cash during a period of market volatility.

 The statistical information contained in this commentary has been compiled from publicly available sources and is presented to you for your review and for discussion purposes only. The information contained in this commentary represents the opinion of the author(s) as of its date and is subject to change at any time due to market or economic conditions.  These comments do not constitute a recommendation to purchase, sell or hold any security, and should not be construed as investment advice or to predict future performance.  Past performance does not guarantee future results.

 The statistical information contained in this commentary was derived from sources that Vogel Consulting, LLC believes are reliable, and such information has not been independently verified by Vogel.  Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of the Russell Investment Group.  An index is not managed and is unavailable for direct investment.