Week Ended November26th, 2021
· On Friday, the Dow Jones Industrial Average fell by 905 points or 2.38% to 34,899.34 as fears of the detrimental economic impact from a potentially severe mutation of the COVID virus, named Omicron by the World Health Organization (WHO) prompted the sell-off during this lightly traded, shortened, post-Thanksgiving session. We believe the financial markets will most likely remain choppy over the near term as it will take some time to determine the communicability as well as the severity of this new strain.
Investors must keep in mind that Friday’s negative response to the news from the WHO came on a day when most retail and professional investors alike were busy doing other things. The financial markets closed at 1:00pm and volume was very light, magnifying the move lower. So prior to drawing any long-lasting conclusions, let’s see how this plays out a bit. In our opinion, there is seldom, if ever a need to run for the exits. However, this is also not a time to be a hero as markets rarely bottom on a Friday. If we are correct in our prediction of a choppy market over the near-term, in addition to normal year-end tax lost harvesting, where appropriate, we will begin to tilt client portfolios more toward those sectors and names that we believe are those with secular growth stories and sustainable pricing power. That said, as noted continuously, client portfolios will remain diversified, focused on their long-term objectives, and adhere to a barbell driven strategy, accentuating growth over value.
· If forced to choose (which we are not), within a quarter we believe this will have been a buying opportunity as the under pinning of the economy remain strong and pharmacological companies remain steadfast in their resolve to contain widespread outbreaks of COVID as well as its mutations.
· The reopening of the U.S. economy along with the recovery trade may be put off a bit as a result of Omicron thereby causing the Fed to hesitate tightening monetary policy. However, this also puts them in a corner as it may result in a continuation of issues pertaining to production, logistics and labor, which is inflationary.
· The stay-at-home stocks which performed so well in 2020, but cratered in 2021 bounced on Friday. Nonetheless, we would steer clear of the likes of Zoom Communications (ZM) and Teladoc (TDOC) as the valuations remain lofty and execution risk remains high.
· As noted above the Dow closed down 905.04 points this past Friday to 34,899.34. This marked the sharpest decline thus far in 2021 on both a point and . We could have said the same thing on July 19 as the Dow dropped 725.91 points or 2.09% to 33,962.04. What is of note is that post the July decline, the Dow has climbed 2.76%.
· Over the three trading days thru this past Wednesday, the Dow Jones Industrial Average had risen 0.57% while the NASDAQ Composite dropped 1.32% as the yield on the 10-year U.S. Treasury Note climbed from 1.54% to 1.64% amidst news of accelerating economic activity bringing with it perhaps a more hawkish Fed. This all came to abrupt halt on Friday (the financial markets in the United States were closed on Thursday in observance of Thanksgiving) as the NASDAQ outperformed and the yield on the 10-year fell back to 1.48%.
· For several weeks we have noted within this update that “we continue to hope that this white-hot stock market will cool off a bit, lest it overheat. Again, we would welcome a ‘time correction,’ aka a sideways moving market that allows for a cooling of investor enthusiasm and for company fundamentals to catch up with the price of their stock.” Perhaps Omicron has provided the conditions for the above.
· It’s amazing how quickly the face of corporate America changes. For instance, sever a lot the companies reporting earnings listed below, despite not being household names are bellwethers for their sectors.
· If the balance of power in the labor market continues to favor the employee as opposed to the employer, expect continued growth in wages which we view as positive for the stock market and America as a whole as well as more of a battle surrounding the areas of the environment, social responsibility and governance (ESG).
· Some of the most well-known names in the industry, specifically Paul Tudor Jones, David Einhorn, and Carl Icahn believe that inflation may be here to stay a bit longer than the Fed has stated they anticipate, in large part due to the large stimulus package as well as the structural issues impacting production, logistics and labor as a result of the pandemic. We agree to a certain extent and are watching this closely. However, we will also remind investors that at some point in the not too distant future, the disinflationary impact of technology will again take hold, dampening inflation.
· In percentage terms, this was the worst Black Friday (day after Thanksgiving) for the Dow since 1931 when it fell 2.76%.
· The Social Security cost-of-living adjustment(COLA) for 2022 will be 5.9%, the largest such hike in four decades. This will result in an average monthly increase of $92 for the more than 64 million participating Americans. It will also push the average monthly benefit up to $1,657 from $1,565 and all told place more than $70 billion into the pockets of retirees and disabled beneficiaries. It should provide an approximate 0.35% bump to economic growth. Unfortunately, at least for now it appears as if real purchasing power will remain flat or even drop a bit as the cost of living has risen more than the COLA.
· It is important to keep in mind that there is quite often a disconnect between current economic activity and the stock market as the latter is a mechanism that discounts economic growth up to twelve months in advance.
· The Federal Reserve through the U.S. Treasury Department continues to exercise traditional measures in attempting to navigate an economic rebound by pushing dollars/stimulus into the economy. Will this work? We believe so. However, keep in mind that historically recessions have been brought about by a lack of consumer demand. This past one was different as it was intentionally created in response to the health crisis. Perhaps there has been too much unnecessary stimulus trying to create demand that was going to be there anyways as the United States emerged from the pandemic. For now, just a thought.
· The upcoming week has some economic releases to keep an eye on. They include Tuesday, November Consumer Confidence; Wednesday, Construction Spending; Thursday, Initial Claims for Unemployment Benefits and on Friday, November NonFarmPayroll Report, November Unemployment Rate and Factory Orders.
· The corporate earnings has begun to winddown. However, some potentially market moving companies are reporting. They include – Salesforce.com (CRM), Rivian Automotive (RIVN), Globalfoundries, Inc.(GFS), Zscaler (ZS), Veeva Systems (VEEV), Crowdstrike Holdings (CRWD),Snowflake (SNOW), Unilever (UN), Marvell Technology (MRVL), Dollar General Corp(DG), Docusign, Inc. (DOCU), CRH Holdings (CRH) and Kroger (KR).
· FOOD FOR THOUGHT
o Investing is about staying within your asset allocation model as the short-term is IMPOSSIBLE to predict whereas the direction of the equity markets over the long haul is VERY PREDICTABLE. Successful investing requires the ability to harness your inclination to respond by selling during times of market stress.
o Stock prices do not move in a linear fashion. If they did they would provide returns similar to that of your bank account rather than their historic annualized8%-10%. Short-term moves in both directions are unpredictable. Did you really think that after a 60% move off the bottom in March, there wouldn’t be a correction?
o We love the statement within an article written by Mike Santoli for CNBC who observes that it is “always worth recalling Peter Lynch’s line that more money is forgone by people anticipating corrections than is lost in corrections themselves.”
o From the perspective of the client it is nearly as uncomfortable and for them even “irrational” to sell or rebalance during a bull market as it is to buy during a bear market.