November 2021 Market Insights
By: Ryan P. Johnson, CFA, CFP® - Director of Portfolio Management & Research
Just under one year ago, we published a video highlighting the first time that the Dow Jones Industrial Average, “The Dow”, hit 30,000. As we again approach the Thanksgiving holiday, we remain thankful that you trust us to help you with your financial planning, investments, and taxes. Now, one year later, the Dow has gained over 20% and recently passed the 36,000 level. Over the past year the S&P 500 has increased over 30% to over 4,700. You may have just noticed a performance gap in those last two sentences. The performance of these indices as well as the NASDAQ are the most widely quoted for stock market performance in the U.S. and the returns among these indices have varied widely over the past two years in particular. The differences include a variety of factors including style and sector allocations, such as a much heavier Technology weighting in the NASDAQ. The S&P 500, the main index we track because it represents over 80% of the market cap in U.S. stocks, has hit a new high at some point every month this year; if we hit a new high in December it will match the 12-for-12 record of 2014.
Inflation is a topic that remains at the top of current investor concerns. So far inflation has not derailed the markets or the economic recovery. Much of the inflation over the past year has been goods-based, including energy and auto prices. Certain branches of the Federal Reserve keep track of “sticky” and “flexible” Consumer Price Indices (CPI). Roughly 70% of CPI is sticky with the rest being categorized as flexible. What we have seen over the past year is a rapid increase in the price of many flexible goods: food, energy, autos, apparel, and lodging away from home. The latest read on these components increased over 15% from a year ago. Flexible CPI has fallen below 0% (deflationary) several times over the past 20 years and has swung 5 to 10% in a year many times. Over the past 3 years, flexible inflation has been just under 5% annualized. Sticky prices, which are dominated mainly by housing costs, then by food away from home, recreation, and medical services, have increased over 3% from a year ago, which is the highest reading since 2007/08. Sticky readings have been above 0% since the data started in the late 1960’s and over the past 30 years, readings have often been in the realm of 2.5%. Over the past 3 years, sticky inflation has been about 2.7% annualized. Lastly, indicators such as the 5-year breakeven rate on inflation-protected bonds (TIPS) show that the bond market is pricing in 3.3% inflation in the coming years. Collectively, this is why the Federal Reserve has begun to taper its bond purchases; still buying more but at a slower rate. This is also why futures contracts currently show higher than 50% odds that the Fed will have its first interest rate hike in June of 2022.
With jobs improving, government stimulus still increasing in absolute dollars, and the average consumer balance sheet still strong, we expect holiday spending will be above average and we expect Q4 GDP growth to be above average.
As we continue to grow, our focus remains on one family, business, or foundation at a time. We would love for you to send the link below to your friends and family, so that we may assist other successful business owners and individuals with their financial needs: https://mybuckingham.com/contact. We again thank you for your continued trust and support.
Ryan P. Johnson, CFA, CFP®
Director of Portfolio Management & Research
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not consider the objectives, financial situation, or needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.