November 2021 Monthly Review
"Trying to Make Some Sense of it All"
By Loyd Johnson, Chief Investment Officer
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A Look Back
The above line comes from the 1973 song "Stuck in the Middle with You", performed by the band Stealers Wheel. It reached #6 on the US Top 100 chart. It has found even more success as theme music in various movies and television shows over the years. Quentin Tarantino famously used it in his debut 1992 film, Reservoir Dogs, and IBM used it in a recent 2020 commercial. The full line from the song goes… “trying to make some sense of it all, but I can see it makes no sense at all”.
Couldn’t that describe where many of us find ourselves as we continue to navigate the two-year-long pandemic and all of the economic and financial market uncertainty it has caused? We see and hear it in the headlines. “Low, short-term interest rates are good” ...well, for some that need cheap money in the form of financing or loans, the answer is yes. For those looking to keep up with inflation with their conservative savings, the answer is an emphatic no. “There should be even more government stimulus.” Maybe. For those that worry about the long-term ramifications of the historic government ramp-up of spending and stimulus, the answer may be at least an “I don’t think so.”
In any event, after making new all-time highs in November, most stock indexes faltered in the last week of the month with the troubling news of a new coronavirus variant dubbed Omicron. Large-cap domestic stocks fared the best with International equities trailing significantly as they have for most of the year. Core Fixed Income had a positive month and closed the gap on YTD negative performance. In particular, Real Estate, both domestic and international, did well for the month as investors searched for alternative asset classes. In economic news, the debate on inflation continued as many disagree on how long and deep the problem may be. The most recent number came in at +6.2% for the year over year timeframe. That represents the highest inflationary gauge in over 30 years. There was a significant miss on the latest domestic employment number, as we added only 210,000 jobs in November versus an expectation of 573,000.
A Look Ahead
The news of another highly transmissible virus variant acted as the latest trigger to spook financial markets at the end of November. There were several one to two percentage point swings down as we all try to digest how, or if this latest news might affect our everyday life and the overall economy around us.
We have written lately about the big-picture valuation concerns we have. They remain and were more pronounced as we made new all-time highs in the month. Many metrics that we look at are stretched by historic standards. The problem is they tell us very little about the short term. Presently, we still have a very accommodative Fed and short-term interest rates at or near zero. Rightly or not, that has acted as a catalyst for stock buying over the last year and a half. With many economic indicators still in the positive column, there is still reason to believe that stocks can go higher in this environment. However, the slope may continue to get a little more slippery. In general, when investors as a group continue to take on risk…prices go higher.
The same is true of the inverse. When people really want to de-risk, it will mean very little where short-term rates are. Stashing cash underneath the mattress may be preferable to the perceived risk of the moment. As a reminder, it was in 1998 that Alan Greenspan first spoke of “irrational exuberance” in the markets…and another two years before the Dotcom bubble burst. We continue to remain cautiously neutral as we make sense of it all...