October 2021 Monthly Review
"Simple Man"
By Loyd Johnson, Chief Investment Officer
LJohnson@fcbanking.com
412-208-7687
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A Look Back
On a recent drive to Raleigh, North Carolina, while enjoying the beautiful color explosion of the changing tree leaves, the song from the above title came on the car radio. I had not heard the Lynyrd Skynyrd classic in quite some time, but the words sunk in like they often do and reminded me of certain truths of life in general, and our financial markets, more specifically. “Be a simple kind of man, be something you love and understand…” Too often, when looking at the world of money management, it is easy to over-complicate the picture. There is seemingly a never-ending barrel of strategies and opinions on how, when, where and why to do things. We believe that the true answers tend to be much more simple. Work with a manager that you know, like and trust. Get your overall asset allocation right. Manage to it. Control the things that you can and keep costs down. All of these things work over time and it is never a bad thing to be reminded of the simple things. Simple worked just fine in the month of October, as the S&P 500 more than made up for a lackluster prior month and delivered a 7% return. It is now up over 24% YTD, and around 100% from the lows of March 2020! Small-Cap domestic stocks lagged, as did International stocks. Indeed, Emerging Market stocks are still slightly negative in 2021, as the economic reopening trade has not been as successful globally as it has here in the U.S. Core bonds continue to bring nothing to the party this year, with the Bloomberg Aggregate index down -1.58% in the first 10 months. Third quarter earnings continue to roll in, and overall, have been stronger than expectations. Over 83% of S&P 500 companies have reported earnings that have topped analyst estimates. GDP increased at only a 2% clip in the third quarter after a 6.7% jump in the second quarter, far below the 6-8% estimates of only a few months ago…but still positive. The latest inflation numbers for September came in at .4%, rising 5.4% over the last 12 months. Although coming from a lower base brought on by the effects of the pandemic, it is still stubbornly high, and much higher than the 2-2.5% level that the Fed targets. Overall, most economic indicators lean toward continued growth here in the States.
By any measure, it has been an amazing climb from the lows of March 2020, as the index has almost doubled. Other equity asset classes posted positive gains as well in the month as small-cap domestic, international developed, and emerging markets all delivered small single digit gains. Core bonds took a pause with a slight negative return of -.19%, and is now -.69% YTD. U.S. real estate continued its momentum with a 1.91% return, and is now up over 31% for the year. Economic releases have been mixed. The most recent jobs report disappointed as nonfarm payroll increased by just 235,000 versus expectations of 720,000. The unemployment rate did fall to 5.2% from 5.4% a month earlier. The August number was the worst reported since January, as many believe the recent surge in Covid cases brought on by the Delta variant is at least partly to blame. The spike in inflation continues to be a concern for many as the debate about whether it is transitory or not plays out in front of us. The most recent report showed a .5% increase in July, and a one-year jump of 5.4%. That level is certainly higher than the 2-2.5% mark that the Fed has said that it feels comfortable with. Regardless, investors have consistently made the best of current situations and driven the prices of many asset classes higher.
A Look Ahead
The jobs number was recently released for October and it was a positive surprise. 531,000 non-farm jobs were created in the month versus the consensus estimate of 450,000. We also reached a post-pandemic low on the actual unemployment rate of 4.6%, down from a 4.8% level a month earlier. That number does fly in the face of some of the comments we hear from small businesses, as they still are having trouble finding and keeping drivers, service workers, etc. We have seen a classic supply/demand shift over the last 18 months, as more and more dollars are chasing less and less available products and services. This in turn has driven up prices across the board. We notice at the grocery store, the gas pump, buying a new home, and more recently, wages for workers…and importantly, in financial assets…like stocks. Most major stock indexes are either at or near all-time highs currently. We have talked previously about bigger-picture valuations being stretched. And they are. Historically, that tells us very little about what the next two or three months might look like. For now, the trend is our friend and we remain fairly neutral with our overall allocation. We worry about continued supply chain distortions and pricing pressures becoming not-so-transitory, but are comfortable taking a cue from Lynyrd, and keeping things simple."