The Great Pumpkin
For those of you who spent Halloween waiting in the pumpkin patch hoping to catch a glimpse of the Great Pumpkin, hopefully you were not disappointed. Investing in the stock market is similar to believing in the Great Pumpkin – maintain an optimistic attitude, remain patient, and be willing to commit time in order to experience the joy of what you hope to achieve.
After a frightening September for the stock market, October did not seem very scary. Strong earnings reports pushed the market higher with the S&P 500 ending the month with a gain of nearly 7%. About half of the companies in the S&P 500 have reported quarterly earnings with roughly 12% of those providing positive earnings surprises. This pace is lower than the previous two quarters but higher than the long-term average of 8.4%, indicating that despite the supposed undertows in the market, companies remain very profitable and continue to experience growth.
Microsoft and Alphabet (Google) had very strong earnings while Apple and Amazon were surprisingly disappointing. There is no doubt Apple and Amazon are extremely profitable and continue to grow but not at the pace analysts expected. The four companies listed above make up about 20% of the S&P 500 so the movement in their stock prices has the potential to have outsized impacts on the index, which is commonly viewed as a barometer of the health of the overall market. While these companies may grab headlines and move the major indices, there are many other stocks making moves with much less visibility. This leads us to believe that individual stock selection and sector weightings will be increasingly important in the foreseeable future.
Similar to children (and adults) coming off a post-Halloween sugar high from eating too much candy, the economy is slowly coming off a high from having large amounts of stimulus pumped into it. This does not mean there is going to be a crash or recession, but rather the pace of growth will be lower than the previous few quarters. GDP numbers released last week were slightly below expectations, but still showed continued growth. The term “stagflation,” which is high or moderate inflation accompanied by slow or no economic growth, is increasingly being used due to concerns of diminishing growth. However, economic growth remains modest for now, but this is an area in which we remain vigilant. In our view, the biggest risks to continued economic expansion are the current supply chain constraints and higher input costs which could possibly lead to a slowdown in spending.
We would be remiss if we did not mention inflation since that is what we see as being the largest risk to investors in the intermediate to long term. The Federal Reserve’s (the Fed) preferred inflation measure, Personal Consumption Expenditures (PCE), was reported last week and remains elevated at the highest levels since 1991 as well as above the Fed’s comfort zone. There seems to now be little doubt inflation remains persistent and will take center stage during the Fed’s discussions when they meet this week.
Earnings reports continue in earnest over the next few weeks, but with many large names already reporting it seems unlikely any individual announcements will move the markets substantially. A continuation of the momentum in positive earnings surprises should provide further tailwinds for the stock markets. It is widely anticipated at the conclusion of their meeting this week the Fed will announce the beginning of a tapering, or reduction, in their monthly bond buying program, often referred to as Quantitative Easing or “QE.” Since the Fed tends to telegraph their intentions in advance their action is generally priced into the market before it happens. Should they deviate greatly from expectations there is the potential to cause some market movement, either up or down, on a short-term basis.
As we head into the last two months of the year, we expect stock market returns to be more muted especially after such a strong showing in October. Close attention is being paid to supply chain issues and how retail inventories, both traditional and online, are affected. Consumer sentiment remains high and indications are most people are willing to spend money this holiday season but it remains to be seen if there will be enough inventory to support a high level of spending. We will also be watching the progression of the infrastructure and social programs bills in Congress, especially how revenue will be generated to pay for each and what impact that might have on individuals, corporations and the broader economy.
Even though we have moved past Halloween and transition into a new month, do not lose faith in the Great Pumpkin, a robust economy or the stock markets. If you would like to have a discussion regarding any potential tax savings moves or portfolio adjustments prior to the end of the year, which is rapidly approaching, please do not hesitate to contact us to schedule a meeting.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
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