Market Commentary


Monthly Financial Markets Commentary — November 1, 2021

Stocks advanced broadly in the month of October, with technology and other growth stocks recording the biggest gains. Investors appear to be largely unconcerned with inflation, buying the Fed's argument that it is a temporary phenomenon. Bonds were mostly flat for the period.

For 2021 the S&P 500 Index, the capitalization-weighted broadest measure of U.S. stock market performance, has returned 23.83%. The Nasdaq Composite Index, another capitalization-weighted index, but more reflective of growth stocks, has returned 20.47%. Finally, the Dow Jones Industrial Average, a price-weighted index, has returned 18.88%. All returns include dividends. Investors have returned to FANG and other glamour stocks in droves, despite the fact that these stocks already have very high valuations. The Fed continues to purchase massive amounts of U.S. government bonds, effectively monetizing more that half of the current federal deficit. The Fed has, however, indicated that it will begin he process of reducing the monthly purchase of debt securities in November. All things being equal this will tend to increase short and long-term rates.

The Barclay's U.S. Aggregate Bond Index, a broad measure of the U.S. bond market, has returned -1.68% year to date. The 10-Year Treasury Note, the so-called "risk-free" rate, jumped to over 1.75% earlier in the year but has since fallen modestly to around 1.60%. This leaves the 10-Year Note with a solidly negative real rate of return, begging the question of why anyone in their right mind would invest in it. The answer appears to be that there are no other options for higher returns in the fixed income space, as every other central bank is pursuing a similar policy of money printing. While most individual investors may prefer stocks to bonds, many institutions, such as banks and insurance companies, are forced to invest in fixed income.

The sectors in the equity market that have performed the best in 2021 are Energy, Real Estate and Financials at 54.2%, 29.1% and 35.4%, respectively. Utilities, Consumer Staples, Communication Services have fared the worst at 6.7%, 6.6% and -10.4%, respectively. The concentration of the major averages in a very select group of high-tech and other favored stocks is a troubling sign.

The comparison of current price/earnings ratios and dividend yields as of November 1, 2021 to those of the prior year is as follows.

Index

Current*

Prior Year*

S&P 500

Price/Earnings

29.27

37.25

Dividend Yield (%)

1.31

1.79

Dow Jones Industrial Average

Price/Earnings

22.95

25.74

Dividend Yield (%)

1.79

2.33

* based on 12-month trailing data

The dividend yield on the S&P 500 has reached the lowest level since the dot-com bubble of 2000, and is one of the best measures of value, since it is a statistic that cannot be manipulated by management.

Current national average CD deposit yields for one-year, two-year and three-year instruments are .65%, .75% and .85%, respectively, rendering this traditional class of investments virtually un-investible.

Gold and crude oil most recently traded at $1,789.15 and $83.50, respectively, compared to $1,895.55 and $38.75 one year earlier. Crude oil and natural gas prices have risen rapidly over concerns of supply shortages.