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Volume 10, Edition 37 | October 25 – October 29, 2021

Prepare for Both Tricks and Treats

Doug Walters, CFA
An average year is full of both tricks and treats for investors that often come without warning. We reminisce about the past year and how full an investor’s goodie bag should be despite the foreboding signs that cast a shadow over last Halloween.

Contributed by Doug Walters, Max Berkovich

What a difference a year makes. While researching today’s Insights, I came across our posting from a year ago (More Tricks Than Treats). It was an uncertain time for investors. Stocks were down nearly 6% on the week, covid was back on the rise, and a contentious election was coming to a head. What happened next could not have been predicted.

What happened? Stocks rallied. By November 5th, they were up 7%. Then they rallied some more, and some more, and some more. Since that low on October 29th of 2020, the S&P 500 is up over 40%. And all of this happened at a time when the pandemic was raging on, the presidential election was being contested, inflation was rearing its ugly head, and supply constraints were disrupting normal economic activity.

Today, stocks are on a roll, having rallied nearly 7% in October, and covid prospects are improving with the delta variant waning. Is this a recipe for a continuation of good fortune? Investors should not spend any time trying to uncover the answer. The better question is, “am I prepared for whatever the next 12 months throw my way?” Long-term investing is much more about preparation than prediction, and at the core is a well-diversified portfolio. As we sit here on this Halloween weekend, the only sure bet is that the coming 12 months will be full of both tricks and treats.

3.6%

Inflation Appearing Transient?

Core inflation came in at 3.6%, below expectations of 3.7%, and perhaps more importantly, is no higher than last month. Inflation doves are hoping that this is budding evidence that inflation will be transient.

Headlines This Week

US Stocks were up this week again, continuing the rally that started early in the month. Growth stocks outperformed as infrastructure debate, earnings reports, and inflation dominated headlines.

A Framework for a Deal

Infrastructure took center stage as the White House announced a framework for the $1.8T “Build Back Better” (BBB) social infrastructure bill.

  • The hope was that with a framework in place, a vote could be held on the $1.2T bipartisan infrastructure bill that already passed in the Senate.
  • That did not happen. Now lawmakers will likely have to wait for the legislative text of the BBB before the House is willing to move, which could take weeks.

What is in a Name

Earnings season continues with over half of companies reported. 82% have reported positive surprises on earnings, while 76% have positively surprised on revenue.

  • Not beating expectations this week were Facebook (FB), Apple (AAPL), and Amazon (AMZN). These were rare misses these market heavyweights.
  • Facebook announced it is changing its name to Meta, with a new ticker MVRS (standing for metaverse). The goal is to reflect the company’s broad array of offerings (and perhaps de-emphasize the Facebook app which is under scrutiny).
  • The scramble is on now to rename FAANG (although nobody cared that Google changed its name to Alphabet… the G stayed).

Inflation Unchanged

Amongst the economics highlights this week was the PCE inflation figure on Friday.

  • Core inflation came in at 3.6%, below expectations of 3.7%, and in line with last month.
  • Inflation bears pointed to the still high levels and risk of a pricing squeeze as we enter the holiday season, while inflation doves pointed to the flat month-on-month result as evidence of transience.
  • Only time will tell which camp was holding the right crystal ball.

The Week Ahead

Taper Time

The Federal Open Market Committee (FOMC) will meet next Wednesday for their monthly gathering to determine America’s monetary policy.

  • As it is the November meeting, the Fed will finally lay out the timeline of tapering its asset-purchasing program.
  • The central bank is currently purchasing $80 billion of Treasuries and $40 billion of mortgage-backed securities (MBS) a month; the likely tapering plan is to reduce treasuries by $10 billion and MBS purchases by $5 billion a month.
  • The focus now will quickly shift to when investors could see interest rates rise.
  • The Fed and investors alike will be keeping a close eye on the Nonfarm Payrolls number, which is out on Friday.
  • Forecasts predict that the economy added 425k jobs in October, with the unemployment rate holding steady at 4.8%

Going Green

The 26th United Nations Climate Change Conference, known as COP26, will commence Sunday and run until the 12th of November in Glasgow, Scotland.

  • The climate change summit will bring together world leaders, including President Biden and his European peers, to accelerate action towards the goals of the Paris Agreement.
  • Notable absences will be Russian President Putin and Chinese President Xi Jinping.

Ahead of Schedule?

The Bank of England (BoE) will meet Thursday amid growing expectations of a move on interest rates.

  • As concerns increase over inflation, the market has fully priced in a modest rate hike from 0.10% to 0.25% at the upcoming meeting.
  • Policymakers at the central bank remain divided on whether upping interest rates is appropriate as Britain’s economy is still recovering.
  • If the rate hike materializes, the BoE will be the first G-7 central bank to raise its rates.

Earnings Rolls On

Another flurry of big names will report next week, with earnings season well underway.

  • Names to look out for include Moderna (MRNA), Pfizer (PFE), Airbnb (ABNB), Uber (UBER), and Berkshire Hathaway (BRK).

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