“You can’t predict. You can prepare.” – Howard Marks
The US stock market rebounded from a poor September performance to reach record levels for the S&P 500, Dow Industrials and the S&P400 Mid-Cap Index. Global equities were also higher, just not with the force we saw here in the US. Commodities continued higher while the Aggregate Bond Index and the US Dollar Index were both slightly lower for the month.
All data as of 11/01/2021, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
In our September 2021 Market Report, we speculated that after a very good run higher this year that the stock market was looking like it was ready to (finally) have a correction. Our thought was that the market was weak and the 200 Day Moving Average (200DMA) looked like a very logical place for the market to stop falling. The 200DMA is considered to be the line of demarcation between bull and bear markets by many technicians. It also, very conveniently, was 10-12% below all-time highs hit in early September. It really felt line a no-brainer to us.
Within a few days of our prediction earnings season began. With earnings season came solid numbers across the board. With solid earnings came new all-time highs for the stock market indexes. As of the end of October the S&P500 has closed at a new all-time high level 59 times.
There are worse ways to be in error about market projections.
Earnings, the Economy and Interest Rates
The driver of the stock market’s direction is ultimately company earnings. Earnings are related to the overall economy, while interest rates help determine the multiple investors are willing to pay for a dollar of earnings. Generally, a higher interest rate environment leads to lower valuations (though not necessarily lower stock prices). Simple, yet not simplistic. Turn on the CNBC talking heads at any given time to hear a discussion on any or all of these three issues.
We mention this because, lately, most conversations we have with clients and prospective clients eventually turn to the stock market. Specifically, the conversation is around “why is the stock market so high and when is it going to fall (or crash, blowup, etc.)” because of X, Y or Z. There is fear around the markets, but not because of earnings, the economy, or interest rates.
Politics, the part you hear on the news or your social media feeds, is usually just noise when it comes to the stock market. Where politics can be significant is with how it allocates government spending. Put another way, who becomes the next governor of Virginia likely won’t affect your stock portfolio, but the contents of the infrastructure bill and the social spending piece of the Biden Build Back Better agenda can drive what sectors one wants to be investing in over the next decade.
Inflation, another popular topic of conversation, is something to be concerned about in relation to your personal finances. When it comes to the stock market and stock market indexes, it isn’t as damaging as many people think. In fact, for many companies and sectors a return to some inflation could lead to greater earnings (even if expenses for things like labor increase). Might not sound right, but it is. Keep in mind the 1990s saw consistent 2-3% inflation and a booming economy and stock market.
We should note that inflation EXPECTATIONS and much more important than the inflation rate. Expectations are what cause people to make decisions that can cause issues. If you believe there will be high inflation, you are more likely to spend now so as not to pay later at a higher price. Enough people do this and all of a sudden you have a very hot economy, more demand than supply, then eventually higher prices in reaction to the hot economy.
Self. Fulfilling. Prophecy.
How Can the Stock Market Continue to Go Higher?
As we write this in early November 2021 the S&P500 has posted 60 new all-time highs this year. Not a record, but very impressive strength. The idea of being at new all-time highs can be scary for some. The implication can be that the market is “overvalued” or “extended,” depending on which piece of market jargon you prefer. The reality can be much different.
In August 2020 the S&P500 was right around 3500 with a Price-to-Earnings Ratio (PE) of 23.2. At the start of November 2021, the index sits just above 4600 and the PE has FALLEN to 21.7. In other words, the S&P500 is up a little more than 30% yet it is trading at a lower valuation.
Wait … What?
Yeah, that wasn’t a typo. That was no mistake. The economy and earnings are what usually drives the market. With all the talk of inflationary pressures, backed up supply chains, and politics consistently being discussed it is easy to dismiss the strong 5%+ real GDP growth rate and blowout company earnings reports. Those earnings have been so strong that the stock market hasn’t been able to keep up!
Wealth Planning and Medicare Part B Premiums
Not the most exciting thing to discuss, but certainly something that anyone currently on Medicare or close to being on Medicare needs to be aware of. Premiums for Part B have been going higher and will likely continue to do so in the future. The Congressional Research Service published a piece on enrollment and premiums dated June 15, 2021. The report notes that the premium for those on Medicare have increased 6% per year on average. For 2021 the standard premium is $148.50. For those making above $88,000 for an individual or $176,000 for a couple the premium cost is between $207.90 and $504.90, based on how much income one receives. Going forward these numbers will likely increase, and increase substantially.
From a planning perspective there are a number of ways to help either avoid getting bumped up into a higher cost bracket or at least limit the extra you would have to pay. If this is something you would like more information about, we would be more than happy to help you evaluate your situation. You can either email us directly at firstname.lastname@example.org or call into the office at 610-437-5650.
American Retirement Savings News
Labor Department to Reverse Rules that Curb ESG in Retirement Plans – Over the past few years more people have been looking for investments that match their values. Newly proposed regulations would allow just that within company 401k plans. In October 2020 the Department of Labor (DOL) released regulations that required retirement plan fiduciaries to select investment choices based solely on financial considerations. One result was not allowing Environmental, Social and Governance (ESG) factors to be considered when making investment choices. This new rule will very likely green light more ESG investment choices in 401k plans, including ESG target-dated options that have been developed by companies like Blackrock and Natixis.
The Social Security 2100 Act – The Social Security Trust Fund has been projected to be depleted by the mid-2030s. If nothing is changed, recipients could expect to receive approximately 75% of their full benefit. While we do not expect this bill to pass this year, the proposed legislation would increase all benefits by 2%, set a minimum benefit of 125% of the Federal poverty line, and change how the cost-of-living benefit (COLA) is determined. To keep the system solvent, additional tax revenue would be raised by applying FICA taxes on income above $400,000, creating a “donut hole” between the current wage ceiling of $142,800 and the new $400,000 threshold where FICA would not be withheld.
While we were wrong about a short-term correction last month, we remain bullish on the stock market. Issues like inflation and the supply chain get headlines, but the economy remains relatively strong and corporate profits have been outstanding. Profits have been so good that the market hasn’t been able to keep up!
It’s easy to buy into pessimism as if feels and sounds so smart compared to optimism, which can sound like a sales pitch. We get that. Still, when we look at what is actually happening the “sales pitch” of stock market optimism feels so right.
On behalf of Magellan Financial we would like to thank you for taking the time out of your busy day to take in our thoughts and opinions. If you found this helpful, please forward it on to others. If you have any questions on the materials presented, would like to be added to our email list, or would like our help with your investments, we can be contacted at 610-437-5650 or via email.
Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com