"I see you standing in the alleys and the hallways. Wait a second, you’re gone now. I run to touch you but you vanish through the doorway." -lyrics from 'Mirage', Tommy James & the Shondells
“The economy is very strong and inflationary pressures are high, and it is therefore appropriate in my view, to consider wrapping up the taper of our asset purchases…” so quoth US Federal Reserve Chairman Jay Powell in his testimony before the US Senate on November 30th. Taking umbrage at the prospects of its punch bowl being taken away investors sold stocks with the Dow Jones Industrial Average closing down 652 points on the day.
Mr. Powell’s opinions can be easily understood if he is relying upon the financial press as a source of his information, but a careful perusal of the economic and financial market data would seem to be painting a significantly different picture. Interest rates on 30 Year US Treasury bond have declined for seven consecutive months and are back to their level of January 5th. The spread between the yields of 5- and 30-year treasuries, which have historically been an excellent predictor of future rates of economic activity, are now at their most narrow level since the onset of the pandemic in March of last year. Oil prices have declined 24% from their recent highs. Despite the issues related to supply chains both wholesale and retail inventories are rising, real personal disposable incomes are down year over year and the U of Michigan survey of consumer spending intentions are at their lows of the 1980 recession fifty years ago.
Economic Armageddon is not being forecast here but the likely single best wager may very well be the significant shortfall of what the 2022 economy has on offer versus the fed’s forecast 3.8% GDP growth rate. The state of the national as well as the global economy is, in a word, fragile, and the belief that global economic conditions are able to support a sustained rise in the inflation rate is just not a realistic one. The unfortunate truth is that the economic conditions since the Global Financial Crisis of thirteen years ago continue to linger like an unwelcome house guest and there has been an absence of anything of sufficient influence upon that reality to materially alter it. So, muddle through is our near-term destiny and another round of quantitative easing in the next twelve months is likely a much better wager than a “three handle” for US economic growth rates.
The November stock market was an interesting and not very positive one though seeming to confirm the beliefs of those who claim the past is prologue for the future. Proponents of the value of the investment discipline of portfolio diversification are left with Thanksgiving pumpkin pie on their face having to explain why anyone should own anything except large cap technology stocks. Foreign developed markets were down 4.5% for the month echoing US small cap’s decline of 4.3%. The value stocks of the S&P 500 were down 3.3%. Meanwhile, the technology stock index was +4.5% for the month led by Apple’s 10.5% rise. Investors in indices though are increasingly attendees, knowingly or not, of the tech stock party, with Microsoft and Apple now representing one-eighth of the S&P 500 and the eight largest holdings, all technology companies, a full quarter of the index. Investors in the US large cap growth indices are increasingly investors in a technology index as those eight names are now 50% of the weighting of that particular market sector.
November saw most investors equity holdings decline 2.25 % though 60/40 portfolios are still enjoying attractive year to date returns of approximately 10% on the back of the equity markets 15.5% contribution. The challenge for investors is to materially build upon the profits accumulated in the first half of the year with the first quarter providing returns of near 5% and the second mirroring the first with another near 5% return. The 3rd quarter was slightly negative for most with a – 0.5% return. October was +3.5% but November was – 1.5% so there we are. Will Santa Claus come bearing gifts? Yes Virginia, and many other states as well, there is a Santa Claus!
Mark H. Tekamp, December 3, 2021