Published October 29, 2021
There were some unusual moves in the markets this week. Some of those movements are attributed to the taxable year-end for mutual funds, which occurs at the end of October. That year-end leads to selling of some positions to capture gains and losses for the tax year. As a result, it is possibly too early to draw any firm conclusions from these moves. One example is the 30-year Treasury bond yield dropping below 2.0% after trading above 2.15% only one week ago and spending the past month above 2%. This move lower in yield flies in the face of the rising inflation narrative. Instead, it points to concerns about the future strength of the economy. Will this move lower hold or is it a short-term, tax-related shift?
This drop in interest rates has sent the U.S. dollar downward out of its recent uptrend. This comes as central banks in other countries begin raising interest rates to battle rising inflation. Depending on the country, central banks can be more or less focused on inflation, employment, and/or economic growth. The U.S. central bank (the Federal Reserve “Fed”) has made it clear they are willing to let inflation rise above their long-term 2% target in exchange for trying to insure that employment and economic growth get fully back on track.
Returning to our initial statement about drawing conclusions from these moves. Fidelity recently posted a slide noting that market volatility tends to be much higher in the middle of the economic cycle, which is where they believe we are. Here is that slide:
At a high level, the global economy suffered a coordinated recession from the pandemic. The recovery from that brief recession will become less coordinated over time. We have entered a phase where economic results are more typical – e.g. much more mixed – with China’s economy undergoing a major shift and shakeout while economies in Europe and Latin America work to fully recover.
This increase in corrections bodes well for us in that higher volatility tends to produce more opportunities for our models to shine.
Investors looked to earnings reports from the heavyweights in the market this week. In anticipation of those earnings, investors bid up shares Monday to a +0.5% gain. Strong results from UPS offset a weak report from Facebook (FB) Tuesday to leave stocks higher by +0.2%. Energy and financial stocks slumped Wednesday leading the market to a -0.5% slip despite good reports from international consumer bellweathers McDonalds (MCD) and Coca-Cola (KO) as well as Alphabet (GOOGL). But the dip was very brief as positive earnings reports poured in Thursday to power stocks higher by over +1%. Strength was broad-based with good news from Ford (F) and Caterpillar (CAT) joining previously positive results from Microsoft (MSFT). The underlying resilience of the current market environment was on full display Friday as investors looked past disappointing earnings from Apple (AAPL) and Amazon (AMZN), which together account for 10% of the stock market’s value. The Nasdaq 100 (QQQ) rose +0.5% despite being weighed down by -2% slides in those huge components.
Stocks added another +1.36% this week, a fourth straight winning week. The Nasdaq 100 (QQQ) surged +3.21%. Smallcap stocks (IWM) ran into resistance, managing only a +0.31% tick upward.
Warm wishes and until next week.