Data takes no holiday
Richard Barrett, Chief Investment Officer | November 25, 2021
As mankind has embarked on something never undertaken before (i.e., the grand re-opening of the global economy), inflation seems to be everywhere. Housing prices, energy prices, food prices all higher-er. Too much money chasing too few available goods. The history books will ultimately have the final say on the root cause of the current inflationary environment: trillions of dollars of stimulus, explosive level of money supply growth, supply chain disruptions, surge in pent up consumer demand etc etc. The answer to the question/problem is all of the above…. but we shall see.
The nominal cost of an average Thanksgiving dinner is +14% this year, the biggest YoY increase since 1990. Real food prices (light blue line) actually have fallen for the past few decades. Even after this year’s big jump, real food prices are only back to 1975 level. When the Fed starting to purposefully reflate the economy back in April/May 2020 I don’t think they thought it would manifest itself in turkey prices, but it did.
Another banner quarter for corporate America
Carl Noble, Senior Vice President of Investments | November 17, 2021
Third quarter earnings season is winding down, and corporate America managed to deliver in a big way again. With 93% of the results in, S&P 500 companies have achieved year over year revenue growth of 17% and earnings growth of 45% as the ricochet from the depths of the pandemic-induced plunge last spring continues.
The earnings surprise, or the degree to which earnings have exceeded estimates, has remained well above the longer-term average for the sixth straight quarter, which is unprecedented. By this point in the economic recovery, analysts have had time to play catch-up and adjust their forecasts yet are still falling well short of the actual results. And this is despite the fact that businesses have had to navigate an evolving set of challenges related to the pandemic like rising inflation, ongoing supply chain disruptions, and labor shortages in some industries. Truly impressive.
Looking ahead, earnings growth is all but certain to slow from this year’s torrid pace. Indeed, S&P 500 earnings are expected to decelerate from 46% growth this year to 7.5% next year. While that may seem like a steep drop-off, it was inevitable that the pace of growth would moderate the further we move past the pandemic-plunge and as the economic cycle matures. More importantly from our perspective is that the overall trajectory of forward-looking earnings is still clearly pointing higher. And higher earnings is one of the key supports for the ongoing equity bull market.
Source: JP Morgan Asset Management, Yardeni Research. As of 11/12/21.
ATH for all ATHs?
Sean Dillon, Senior Vice President of Investment Strategy | November 8, 2021
2021 is shaping up to be quite the year for equity returns. We are on the verge of setting a record for All Time Highs (ATHs) in the S&P 500. It would mean that an ATH was reached in over 31% of all trading days in 2021! And we know why. Strong earnings growth, ample liquidity, and open credit markets are fueling this great bull market.
The record amount of ATHs was in the year 1995 at 77 followed in second place by 1964 at 65. This year, as of November 5th, the number is 64. There is a commonality with the previous years mentioned and this year, and that is they are in the middle of strong bull markets. From 1965 to 1968 the S&P 500 moved 30% higher and from 1995 to 1999 the S&P 500 moved 135% higher. This strength in equity returns is a feature, not a bug, of bull markets and we believe you will continue to see new ATHs over the coming years.
Source: Charlie Bilello Closing prices as of 11/5/21
From a risk management perspective, we wrote about new all-time highs and what that means for the likelihood of corrections and average drawdowns. Again, new highs are a bullish characteristic not a bearish one so we would expect better results from all-time highs in both areas. This is exactly what our studies found. Chance of a 10% drawdown in the next 3 months drops to 5% from 15% and in the next 6 months drops to 15% from 25%. The average drawdown over the next 3 months falls to 4% from 5% and over the next 6 months falls to 6% from 7.5%. Equity markets can and will go down at any time, but these results are consistent with our strategic thinking that right now it’s less risky to be overweight risk.
So, keep calm and buy those ATHs!
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