Market Commentary | August 2021

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Market Commentary | August 2021

Rob Kellogg, CFA®

Sep 07, 2021

As discussed in last month’s commentary, we felt November was going to be one of the more pivotal months that this country has seen in quite some time. Well, November lived up to its billing. As the page turned to the final month of the year, November experienced one of the most divisive U.S. Presidential Elections, the announcement of multiple vaccines’ effectiveness, and new all-time highs in the equity markets. December is sure to be intense as well while President Trump continues to contest the election, and as many states are determining how to handle the rise in cases of COVID-19 in tandem with the potential distribution of a vaccine. December will close the book on what has been one of the most interesting years in many of our lifetimes. We will keep this month’s commentary brief as we look forward to recapping the year in our annual commentary next month.

THE MARKET

Equity markets experienced a historic month in November as the S&P 500 finished up 10.75% and is now up 12.10% on the year.

The Dow Jones Industrial Average (DJIA) is now up 3.86% on the year after finishing the month of November up 11.84%. The technology heavy NASDAQ continues to perform well in 2020 as it is now up 35.96% on the year after finishing the month up 11.80%. Small cap stocks led the monthly performance numbers as the Russell 2000 is now up on the year by 9.07% after a tremendous month of November saw it increase by 18.29%.¹ That is the strongest ever monthly performance for the index.² Monday, November 30^th, saw a dip in the markets to close out the month as monthly rebalancing likely trimmed the equity exposure in portfolios and investors were eager to lock in the gains experienced in November.

IMPACT OF THE ELECTION AND THE VIRUS

A large part of the monthly gains can likely be attributed to two factors. The U.S. Presidential Election has led to political certainty and there was positive news surrounding a COVID-19 vaccine. Investors are in favor of the political certainty as President Elect Joe Biden was able to defeat President Donald Trump in the November 3^rd election. President Trump continues to contest the election, but he has yet to have any significant wins in court. President Elect Biden named Janet Yellen as his pick for U.S. Treasury Secretary. It is not expected to face much resistance in the Senate; however, she will need 51 votes to be confirmed. If Republicans maintain their majority of 52 seats after the Georgia runoff, Democrats will need to swing 3 senators to confirm her. If she is confirmed, she will be the first female to hold the role. She will be a welcome sight for Progressives as she served as the Chair of the Federal Reserve during the former President Obama’s second term. She was later replaced by Jerome Powell as Chair after Trump’s 2016 campaign targeted her for keeping interest rates too low. Current Secretary Mnuchin said that he will work with his successor “if things get certified,” which should further put investors’ minds at ease.³

As the election results became clearer, so too, did news regarding vaccine trials. Pfizer, BioNTech, Moderna, and AstraZeneca all announced positive news regarding late stage trials of a vaccine.⁴ From the perspective of many investors, this positive news was able to outweigh the increased number of virus cases, thus causing markets to rally throughout the month. The image to the right shows the daily number of virus cases throughout the year.

The United Kingdom gave emergency authorization on Wednesday, December 2^nd, to Pfizer’s coronavirus vaccine. This makes them the first Western country to approve a vaccine for distribution. With the vaccine being codeveloped by an American company, this authorization puts more pressure on U.S. regulators to move faster.⁶ Federal government officials are promising that a vaccine will come soon, and some have even said before Christmas.⁷ However, only a limited number of vaccines will be available for immediate distribution following any sort of approval. As a result, a plan must be put in place to best curb the spread of the virus and to protect those most at risk. In a recent meeting, the Centers for Disease Control and Prevention (CDC) voted on which groups of people will be the first to receive the vaccine. In a 13-to-1 vote, it was decided that health care workers and residents of nursing homes and other residential care facilities will be first in line.⁸ The rest of the country may have to wait until late spring or potentially even until the summer of 2021.⁷ While we still may be months away from a widely distributable vaccine, the recent news on effectiveness of the vaccines and the news from Britain shows us that there is a light at the end of the tunnel.

CONCLUSION

With all of the news surrounding the election, the virus, and the markets, it can be difficult, and certainly stressful contemplating your investments. The good news is that you shouldn’t have to make sense of it all. Your financial plans should be built based on your own risk tolerance and your own financial objectives. The ebbs and flows of the markets will come and go with each new headline and each passing day, but your portfolios should be built to withstand the volatility. We will inevitably experience more negative news surrounding the virus. There are likely to be more lockdowns in certain parts of the country and visiting family over Christmas could become more controversial than it was over the Thanksgiving break. There will be positive news too. Recent unemployment applications fell last week after a recent jump signaling that layoffs are easing, even though they remain high as the labor market continues to recover.¹⁰ More positive developments on the vaccine front are likely as well. The resulting short term market fluctuations may be tough to look at as they scroll across the bottom of your television, but it is important to remember that your money exposed to this risk is meant for longer term goals. Remember to maintain your disciplined investment approach and take the emotion out of investing. Understanding your portfolio is about understanding expectations. It’s about having a sense of how your portfolio is designed and how it should behave over meaningful periods of time. Having a sense of how the investments should react to certain movements in the market. Having a dynamic plan in place should put your mind at ease when volatility is high. Please don’t hesitate to reach out if you’d like to revisit your risk tolerance and asset allocation. It is important that you feel comfortable about your current portfolio as December is likely to continue with the volatility seen thus far in 2020.

1 https://www.investing.com/indices/

2 https://www.reuters.com/article/us-usa-stocks/sp-500-ends-down-after-rallying-to-best-november-ever-idUSKBN28A1MH

3 https://www.foxbusiness.com/markets/if-treasury-secretary-janet-yellen-make-history

4 https://www.cnbc.com/2020/12/01/world-stocks-outperform-the-us-in-bumper-november.html

5 https://covid.cdc.gov/covid-data-tracker/#trends_totalandratecases

6 https://www.nytimes.com/2020/12/02/world/europe/pfizer-coronavirus-vaccine-approved-uk.html

7 https://www.cnn.com/2020/11/30/health/covid-vaccine-questions-when/index.html

8 https://www.webmd.com/lung/news/20201201/cdc-votes-on-who-should-get-covid-vaccine-first

9 https://www.juliusbaer.com/es/insights/artificial-intelligence/the-robots-keep-coming-finance-gets-techier/

10 https://www.wsj.com/articles/weekly-jobless-claims-coronavirus-13-2-2020-11606950268

Returns are based on the S&P 500 Total Return Index, an unmanaged, capitalization-weighted index that measures the performance of 500 large capitalization domestic stocks representing all major industries. Indices do not include fees or operating expenses and are not available for actual investment. The hypothetical performance calculations are shown for illustrative purposes only and are not meant to be representative of actual results while investing over the time periods shown. The hypothetical performance calculations for the respective strategies are shown gross of fees. If fees were included returns would be lower. Hypothetical performance returns reflect the reinvestment of all dividends. The hypothetical performance results have certain inherent limitations. Unlike an actual performance record, they do not reflect actual trading, liquidity constraints, fees and other costs. Also, since the trades have not actually been executed, the results may have under- or overcompensated for the impact of certain market factors such as lack of liquidity. Simulated trading programs in general are also subject to the fact that they are designed with the benefit of hindsight. Returns will fluctuate and an investment upon redemption may be worth more or less than its original value. Past performance is not indicative of future returns. An individual cannot invest directly in an index.

This material has been prepared for information and educational purposes and should not be construed as a solicitation for the purchase or sell of any investment. The content is developed from sources believed to be reliable. This information is not intended to be investment, legal or tax advice. Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values. Investment advisory services offered by duly registered individuals on behalf of ChangePath, LLC a Registered Investment Adviser.

Index Returns (as of 11/30/2020)	Level	November	QTD	YTD
S&P 500	3621	10.75%	7.69%	12.10%
Dow Jones Industrial Average	29639	11.84%	6.68%	3.86%
NASDAQ Composite	12199	11.80%	9.23%	35.96%
Russell 2000	1820	18.29%	20.70%	9.07%
MSCI EAFE	2054	15.38%	10.70%	0.83%
MSCI Emerging Markets	1205	9.21%	11.37%	8.11%
U.S. Aggregate Bond	-	0.98%	0.62%	7.36%

Source (1)

Source (5)

Source (9)

THE MARKET

August was one of the year’s best months for the investors as the S&P 500, the Dow Jones Industrial Average (DJIA), and the NASDAQ Composite each hit new all-time highs. It is the seventh straight month of increases for the S&P 500 as it finished the month up 2.90%, and the index is now up 20.41% for the year.¹ Coming in alongside market highs was earnings growth as 98% of companies in the S&P 500 have now reported for the second quarter. Earnings were expected to be higher this year relative to the lower levels caused by the virus in 2020 as estimates for second quarter earnings growth came in at 63%. However, with almost all companies having reported, earnings growth significantly outperformed expectations as it came in at 89% helping the market reach new highs.²

Index Returns (as of 8/31/2021)	Level	July/QTD	YTD
S&P 500	4,522.68	2.90%	20.41%
Dow Jones Industrial Average	35,359.08	1.21%	15.53%
NASDAQ Composite	15,259.2	4.00%	18.40%
Russell 2000	2,273.77	2.13%	15.14%
MSCI EAFE	2,356.42	1.52%	9.73%
MSCI Emerging Markets	1,308.67	2.42%	1.35%
U.S. Aggregate Bond	-	-0.19%	-0.69%

Source (1)

The DJIA finished August above 35,000 as it was up 1.21% during the month and is now up 15.53% on the year. Leading the indices this month was the NASDAQ as it was up 4.00% in August and is up 18.40% on the year. Small caps stocks finished the month up over 2.00% and are up over 15% on the year. The MSCI EAFE index is inching closer to double digits for the year as it is now up 9.73%, and the MSCI EM index is now back in positive territory up 1.35% on the year. After a positive July, the U.S. Agg fell 0.19% during August and is now down 0.69% on the year.¹

THE ECONOMY

Job creation, unemployment, and wage growth all came in with better-than-expected numbers to start the month only to disappoint with numbers from September 3^rd. Job creation was expected to be around 720,000 new hires in the month of August, but the Labor Department reported only 235,000. The chart below shows job creation since the start of 2020, and many point to the Delta variant of the virus as to why job creation came in unexpectedly low in August. “The labor market recovery hit the brakes this month with a dramatic showdown in all industries,” said Daniel Zhao, senior economist at jobs site Glassdoor. “Ultimately, the Delta variant wave is a harsh reminder that the pandemic is still in the driver’s seat, and it controls our economic future.” ³

Source (3)

Unemployment fell from 5.4% to 5.2% which was more in line with analyst expectations this month. Employment numbers sill remain below pre-Covid levels as there are 5.6 million fewer workers today than before the pandemic. It is not because of lack of jobs though, as the placement firm Indeed estimates that there are 10.5 million open jobs, which is comfortably a record for the United States’ labor market.³ With 7.5 million workers about to lose their unemployment benefits on September 6^th, the labor reports for September will be a telling sign.⁴ Combine that with the Delta variant causing issues and we could see changes from Congress. These numbers will be key for the Federal Reserve Board (Fed) as they look to taper their bond purchasing sometime later this year. With the strong economic numbers from July that were reported on August 6^th, many thought the tapering was a foregone conclusion, but September will be an important month regarding Fed policy. The Fed is likely to announce the tapering of bond purchases in November, but that does allow them time to receive more data on the labor market recovery and economic growth.⁵ For reference, when the Fed buys bonds, it stimulates the economy by increasing the money supply. Also, keeping interest rates lower allows for more borrowing with lower financing costs and investing to stimulate the economy. These are two levers that the Fed has been pulling since the start of this pandemic. The Fed has made it clear that increasing their target interest rate will not occur until after bond purchases have been tapered.

While eyes will be on the Fed regarding their policy decisions, there are also big items on the docket for Capitol Hill with the budget resolution bill and the infrastructure bill. In a party-line vote, the House of Representatives passed the $3.5 trillion budget resolution bill on August 24th. While this allows for $3.5 million more in spending, Democrats still have hurdles to overcome as this vote allows them to write and approve a massive spending package without Republicans. They will still need to write and gain support for a budget bill before they approve the infrastructure bill which is tentatively set to be voted on by September 27th.⁶ September is sure to be an important month from all perspectives as it relates to our economy.

CONCLUSION

While there were many headline grabbing negatives in the month of August, they could still not keep the market down. We had inflation concerns, labor shortages, and the Delta variant along with many others. These topics will continue to stay top of mind for the remainder of the year, and we can’t expect the same type of market performance or a smooth ride. Volatility spiked in mid-August as the VIX hit 24.74 before calming down to end the month as it fell to 16.67. ⁷ We expect these bouts of volatility to continue throughout the remainder of 2021 in our headline driven society. It’s important that investors maintain discipline through the volatility as the image below shows the result of the average investor trying to time the market through volatility rather than staying the course with a disciplined 60% equity and 40% fixed income (60/40) or 40/60 type of portfolio.

Source (8)

The Fed will eventually start their tapering of bond purchases, virus talk is sure to pick up during the Holiday season with potential restrictions, and Congress will try to work through both the infrastructure bill and a budget plan. Second quarter earnings season is almost complete, and we’ve had peak growth with peak earnings. As one can see, the remainder of 2021 expects to be quite eventful and there should be no surprise if the market follows suit from a volatility perspective. There are concerns on the horizon. Because of these unknowns, we continue to recommend a disciplined portfolio according to your risk tolerance and investment objectives. If you’d like to update your risk tolerance or revisit your investment objectives, please reach out to schedule a meeting today.

1 – https://www.investing.com/indices/major-indices

2 – https://www.nasdaq.com/articles/august-2021-review-and-outlook-2021-09-01

3 – https://www.cnbc.com/2021/09/03/jobs-report-august-2021.html

4 – https://www.cbsnews.com/news/enhanced-unemployment-benefits-end-whats-next/

5 – https://www.reuters.com/business/fed-likely-announce-taper-november-former-fed-official-says-2021-09-03/

6 – https://www.cnbc.com/2021/08/24/house-passes-budget-resolution-advances-infrastructure-bill.html

7 – https://finance.yahoo.com/quote/%5EVIX/history/

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Market Commentary | November 2021

03 Dec, 2021

November was a dizzying month for investors. The highlight? Earnings. 82% of companies1 beat estimates this quarter, despite headwinds such as supply chain constraints and inflation. The market’s biggest muse? Elon Musk’s twitter handle, with tweets such as (paraphrased) “should I sell 10% of my Tesla stock?” The most exciting job? Fed watcher. We started tapering, saw a plethora of hot inflation data, and gleaned insight from Federal Reserve Chair Jerome Powell on the last day of the month. November 2021 Market Returns

Market Commentary | October 2021

03 Dec, 2021

October was another positive month for the markets after September’s pullback. So far in 2021, the S&P 500 had nine positive performing months, September being the only hold out. The index ended up 6.9%, even though the first week of the month started a bit volatile. However, 2021 is looking robust, even if November and December aren’t large contributors, as the YTD performance through October is 23.9%. 1