Higher and Higher

By Crest Capital Advisors on November 5, 2021

Dow: 1.42% to 36,327.95
S&P 500: 2.00% to 4,697.53
Nasdaq: 3.05% to 15,971.59
Russell 2000: 6.09% to 2M437.08
10 Year Yield: 1.45%
Outperformers: Consumer Discretionary 4.99%, Technology 3.34%, Materials 3.19%
Underperformers: Healthcare (0.67%), Financials (0.63%)

New week, and new month, and US stocks rallied again this week. Growth stocks outperformed value, though many re-opening plays also did well, particularly thanks to positive news on the Covid therapeutic front. But it was small caps, as evidenced by the Russell 2000 index, that really stood out this week with a whopping 6%+ gain on the week.

As we’ve noted in the past, the path of least resistance remains higher with the S&P 500 index up for a fifth straight week and a fourth straight week of gains of more than 1%. A crucial component to this narrative is the conclusion that central banks, and the Fed, in particular, will be measured in their actions around removing policy accommodation. The key takeaway from the FOMC meeting definitively revolved around a lack of any hawkish surprises. The announced tapering pace of $15B a month was right in line with expectations and the mention that the pace could be adjusted depending on changes to the outlook was widely previewed. The statement dialed back the transitory inflation language to reflect heightened uncertainty but did not flag inflation as a risk to the outlook and the Fed said it still expects supply chain pressures from the pandemic and reopening to ease and inflation to moderate.

Q3 earnings season continues to showcase a robust consumer and corporate demand backdrop that has helped to keep profit margins at elevated levels. (more on this below) According to FactSet, just under 90% of S&P 500 companies have now reported Q3 results and the blended growth rate ended the week at 39.1%, up from the 27.5% expected at the end of the quarter. In aggregate, companies have reported earnings 10.3% above expectations.

In Washington, negotiations and debate continue (as of press time) around the bi-partisan infrastructure bill and the Democrats ‘build back better’ plan. The struggle between moderates and progressives within the party continues and the election results in Virginia and New Jersey earlier this week have only served to further the impasse between the two.

Payroll Takeaways

A lot of noise and media headlines around the “surging” employment after today’s payroll report. But the bottom line is more nuanced. The headline gain of 531,000 net payrolls this month is inflated by upward revisions of 235,000 to the prior two months, which means they were not the big misses they seemed at the time. The drop in the headline unemployment rate that accompanies today’s report is precisely on track with our expectations for a return to the pre-pandemic level by April 2022.

BUT, for those fearing strong employment will lead to the inevitable rate hikes in the not too distant future, the composition of job gains likely does NOT meet the Fed’s new “inclusive maximum employment” criterion for lift-off. Inside this month’s report, we see the jobs improvement is coming predominantly in areas that haven’t favored minorities. The 104,000 expansion of the labor force also implies pre-pandemic levels won’t be reached until 2024. And wage gains moderated from last month’s scorching pace, which should help inflation expectations begin to relax. So, investors would be wise to take the Fed at face value and believe them in their mission to accomplish social as well as financial objectives.

Market-implied expectations for “lift-off” in September 2022 have already been pushed out from July. From our point of view, and based on the pace of job creation and labor force expansion, expectations for lift-off probably need to be pushed out even further.

Un-Conventional Wisdom

In our view, there’s a good chance that multiple vaccine mandates may exacerbate the labor market shortage.

Over recent weeks, the uptick in vaccinations has been driven largely by booster shots. Although the US recently reached 80% of adults at least partially vaccinated, the pace of newly vaccinated people has been steady at a low level over the past few months. The new private-sector vaccine mandate, applicable to private businesses with more than 100 employees, was released by OSHA yesterday and is set to take effect in 2022. While this new mandate will likely lead to some increase in vaccines, we anticipate that employers are going to experience some turnover as well while already dealing with a labor shortage.

401k Bump

The 2022 IRS indexed dollar limits for qualified retirement plans were released this week and are summarized in the table below. The most notable change is the limit increase to employee 401k plans from $19,500 to $20,500 per employee. Catch-up contributions for those over age 50 remain at $6,500 per person.

ETF Milestone

The record-setting year of the ETF keeps getting stronger. Assets in US-listed funds were sitting at $6.99 trillion at the end of October, up sharply from the end of 2020. The $7 trillion level is already a foregone conclusion at this point, particularly with the strong start for markets thus far in November.

Overall, there was $6.99 trillion in US-listed ETF assets at the end of October 2021, up from $5.47 trillion at year-end 2020, according to CFRA data. Indeed, the combination of strong equity market returns and $726 billion of positive net ETF flows year-to-date through October has driven total assets to reach new highs. Equity ETFs gathered 76% of the new money so far in 2021, slightly lower than the asset category’s 80% share of the market. The chart below shows the share of the market divided by the 4 largest ETF managers, iShares, Vanguard, State Street (the SPDR funds), and Charles Schwab.

Crazy Stat(s) of the Week

Here are this week’s crazy stats:

Private Equity exits are on fire as rapid economic growth and strong markets fuel an already historic year for firms and portfolio companies. PitchBook’s Q3 2021 US PE Breakdown illustrates an astounding run for PE exits, with 2021 year-to-date exit value already 50% larger than the next-highest annual figure, and currently estimated to top $638 billion through Q3.
S&P 500 next twelve month expected profit margins have remarkably responded off the March 2020 low, surging from just over 13.0% to a high of 17.4%. This is the highest reading we’ve seen in decades and explains why stocks have been so resilient.

Microsoft was the largest company in the world back in 2000. It then suffered a 70% drawdown over the next 9 years to its low in March 2009. It did not surpass its 2000 high until 2014, 14 yrs later (total return). Today it is once again the largest company in the world with a market capitalization in excess of $2.5 trillion!

Quote of the Week

“By January 4^th, this pandemic may well be over, at least it relates to the United States after we get through this Delta Wave.”

– Dr. Scott Gottlieb on CNBC Squawk Box November 5^th, 2021.

Editors Note: We can’t wait until the government “powers that be” finally take one of these “off-ramps” to the endless pandemic. Thus far vaccines and mandates have yet to do the trick. Dr. Gottlieb and Pfizer’s announcement of a successful therapeutic are yet another opportunity!

Calendar of Events to Watch for the Week of November 8^th

While we’re past the peak of Q3 earnings reporters, we still have a heavy dose of Q3 earnings updates streaming throughout next week and dominating much of the news flow. On the economic front, it will be all about inflation as we get last month’s PPI and CPI reports. Markets will want to see these data sets begin to moderate or else we may see some nervousness emerge as investors fret about the beginning date of rate hikes.

Monday 11/8 – No major US economic reports due out today. Looking overseas, investors will be interested to see loan growth Money Supply data out of China.

Tuesday 11/9 – The October Producer Price Index (PPI) is expected to come in hot at 0.45% month-over-month and a whopping 7.0% year-over-year.

Wednesday 11/10 – Fresh on the heels of the Producer Price Index, the Consumer Price Index (CPI) report is expected to show a substantial 0.5% month-over-month and 5.8% annual rate of inflation. We’re waiting for Webster’s to change the definition of “transitory” in order to fit the Fed’s narrative.

Thursday 11/11 – Today is Veterans Day. We salute all those who have served in sacrifice to our country! The bond market will be closed today in observance.

Friday 11/12 – The University of Michigan Sentiment Survey for October will be released and is expected to show a slight uptick to 73.9, up from 71.7 in the prior month.

Source: FactSet

Crest Capital Advisors is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC (member FINRA and SIPC). Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

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