Financial Insights- November 15, 2021

BOO! SCARY OCTOBER HAS COME AND GONE 

While September is the month that on average has the worst performance for equities, October is the month that is known for extreme volatility that often scares investors. Although bouncing around most of the month, it did so by bouncing up finishing with almost a 7% return. This was a direct result of another quarter of better than expected earnings and decreasing COVID cases. As we head into November, which traditionally is on average the best month of the year, we are hopeful that the markets continue to move upward but prefer for it to be on a slow and steady course. Given that guidance from companies has been primarily positive, it bodes well for at least early 2022, but the gains we have enjoyed so far this year are not likely to be matched next year.

3Q CORPORATE EARNINGS RECAP

With over 90% of the S&P 500 companies having now reported earnings, we look back at third-quarter results. U.S. corporate earnings growth of 41% was considerably higher than analyst expectations of 23%, but also down from the 92% growth realized in the second quarter. With that said, the market has reacted positively given that the second quarter likely marked peak earnings growth this cycle, and the third quarter was still strong despite concerns over inflation-related margin pressure arising from supply chain constraints.

Over 80% of S&P 500 companies beat earnings estimates, with the strongest growth coming from those sectors hardest hit from the pandemic-related shutdown including materials, industrials, and energy. Looking forward, Wall Street analysts are expecting 21% earnings growth in the fourth quarter with cyclical sectors expected to continue their outperformance. The fourth quarter is usually strong for stock performance, but undoubtedly has its exceptions (like 2018). With the S&P 500 up about 7% quarter-to-date, we wouldn’t be surprised to see some profit-taking and rebalancing weigh on returns over the next few weeks but ultimately expect positive returns through year-end.

FED CHANGES COURSE 

At its meeting this month, the Federal Reserve Board formally announced the long- signaled reduction in bond-buying. Almost since the beginning of the pandemic, the Fed has been buying $120 billion of bonds each month to keep long-term interest rates low that encourage borrowing to stimulate the economy. Effective immediately it will reduce the bond-buying by $15 billion monthly which means by July of next year they will not be buying bonds. Then depending on the state of the economy, they may start raising interest rates.

So, what are the likely effects of this move? Much will depend on how the bond markets respond and how inflation reacts. If bond buyers step up to the plate to replace the Fed’s buying, then longer interest rates should stay steady with perhaps an upward bias. On the other hand, if bond buyers feel that inflation is not going to calm down next year, they may hold off in anticipation of rising interest rates later in 2022.

JOBS, JOBS, AND MORE JOBS 

Bouncing back from three months of lower-than-expected jobs being filled, the number of new jobs in October jumped to 531,000 and the unemployment rate fell to 4.6%, down from 4.8%. Even better, the weak job numbers from the previous two months were increased by 235,000. Thus, over 750,000 new jobs were identified. It appears that with the Delta variant on the wane, the record number of jobs available is starting to be filled. One month does not constitute a trend, but every trend starts with one month. These additional jobs and lower first-time unemployment claims are a good sign for business and the economy, and should they continue into the end of the year, it will likely set up a good start to 2022. With all the good news, we still need to keep in mind that 4.2 million people employed before the pandemic are still not working.

EARNINGS, INFLATION, AND GDP COMPARISONS ARE GOING TO GET TOUGHER

Think back one year ago, we were starting to have hope because both Pfizer and Moderna announced they had developed an effective vaccine against the coronavirus. Even before, the economy was beginning to adjust to its new normal of living with COVID and was starting to bounce back from the short recession and bear market of the spring. Donald Trump was still President, but Joe Biden would soon move into the White House. As things started to come together corporate earnings started to grow, inflation was still tame, but you could feel it starting to happen, and GDP was ever so slowly starting to move in the right direction. The momentum started then and has continued unabated, but now it is about to run into itself. How? The comparison of future earnings will be against the large growth in earnings over the past year. Inflation will likely be high for another quarter or two, but then it will become compared to the high inflation this year, so it should slow. GDP growth has already started to slow the past two quarters with the 3rd quarter being the weakest this year. No, we are not going into a recession, at least not in the foreseeable future. Growth will happen; it just appears that it will slow down. Do not be alarmed. There is no way we could, should, or want to continue at that torrid pace of the past 12 months.

INFLATION HELPS RETIREMENT SAVERS

The IRS just announced that the contribution limit for 401(k), 403(b), and most 457 plans increased from $19,500 this year to $20,500 next year. Unfortunately, the catch-up provision for those age 50 and over is staying the same at $6,500 so the maximum total is $27,000. The regular and Roth IRA contributions did not change either staying at $6,000 and catch-up of $1,000. SIMPLE retirement plans can now contribute up to $14,000 representing a $500 annual increase.

WOMEN: Finding the balance between saving and embracing risk

Undoubtedly, women face unique challenges in preparing for retirement including longevity, caregiving responsibilities exacerbated by COVID, and the pay gap. 

Would you believe that a JP Morgan paper on “Women and Retirement” found that 69% of women compared to 49% of men take average or below average risk when investing?

Women tend to keep a higher portion of their wealth in savings or cash. Though we agree about the importance of having an Emergency and Opportunity fund that offers a safety net, keeping too much money in a savings account has serious negative long-term financial planning implications, especially with inflation and low-interest rates.

Sally Krawcheck of ElleVest told CNBC “Make It” that the biggest investment mistake women make is not investing. She stated that women “tend to leave more than 70% of the wealth in cash as opposed to investing it.” What a stark difference between savings accounts, paying between .01% to .05%, and the S&P 500 posting long-term returns historically over 8%.

Both savings accounts and the stock market involve risk. For savings, the risk is that you will not have enough money to retire. The risk with investing in stocks is that they can go up and down at any given time. By being too risk-averse and using only savings, some women are missing out on the opportunity to potentially ensure their financial security and to build wealth through investing in the stock market.

THE HOLIDAY SEASON IS UPON US 

Okay, where did the last 46 weeks disappear to? Thanksgiving is only ten days away and we can almost smell the turkey in the oven. Then there is Hanukah, Christmas, and New Year’s. As we look back, the year has gone quickly, but it was a year filled with hope and maybe closer to a normal life. We have much for which to be grateful – family, friends, colleagues, and the chance to meet even more people in the future. We live in not only a great country, but the best in the world from our humble perspective. We remind ourselves that we are grateful for the confidence you have placed in us to assist you with your financial planning and investment management needs. May you, too, count your blessings. Have a wonderful holiday season. Be safe and be well.

IMPORTANT DISCLOSURE