Usually it’s March, but this year, thanks to Fed Chair Powell and Omicron, it was November that came in like a lamb and went out like a lion. Powell’s ‘broken record’ denial that inflation could become problematic, combined with the Fed’s ongoing printing of money, U.S. M2, up +37% since February 2020, a further +13% year-over-year in October, kept investors dancing into the 3rd week of November. As shown by the one-year indexed graph below, the big winners during this latest leg of the rally were the ‘macro cap’ tech stocks (white line). In fact, at the November peak in the S&P 500, the six stocks highlighted below accounted for 26.4% of the SPX and 50.7% of the NASDAQ-100.
Equities roared back during October 2021 as markets were comforted by temporary stop-gap bills on America’s debt ceiling problem, respectable U.S. economic data, improving COVID-19 trends and a generally better-than-expected start to the Q3 earnings season. While the month closed with investors enjoying the 59th all-time high for the S&P 500 year to date, two stories that dominated headlines were the stunning climb in yields on two-year government bonds and the relentless rise in the price of oil. We’ll discuss oil later in this note but for now, please review the far right of the graph below, highlighting rise in yields on two-year bonds during October. German bunds (yellow line) are on the left axis, other sovereigns are on the right axis. Clearly, markets are pressing Central Banks to hike interest rates.
Last month’s commentary stated that “we now view markets as being expensive, with an increasingly asymmetrical risk/reward outlook when peering out over the next 12 months”. The S&P 500 had been trading comfortably north of 20X forward EPS amidst signs that monetary accommodation had peaked and a material retrenchment in fiscal stimulus was forthcoming. Our investment team proceeded to tactically reduce the net exposure of each of our two funds, resulting in solid net gains for the month of September.
While the deck of cards that market participants base their investment decisions upon has remained constant since COVID-19 changed the global dynamic 18 months ago, continued reshuffling of that deck has catalyzed significant month-to-month volatility across asset classes, equity sectors and factors. Unprecedented levels of liquidity remains the dominant variable pushing equity indices higher, yet larger-than-expected rates of deceleration in the American and Chinese economies (please see graph below), combined with fears surrounding the Delta variant, caused the growth style of investing to continue to outperform value during August.