Market Strategy 10/25/2021
Don’t ask “are we there yet?” but rather “where to from here?”
This week will have plenty of things to grab investors’ attention with three of six major US equity benchmarks having closed at record highs last week.
Key Takeaways
- With 117 of the S&P 500’s companies having reported Q3 results thus far, earnings are up 46.09% on back of 16.08% revenue growth.
- This week 164 S&P 500 companies are scheduled to report including a brace of widely followed names in Information Technology, Consumer Discretionary, Consumer Staples, Industrials, Healthcare, Energy and Communications Services.
- The 10-year Treasury Yield approached the high for the year last Thursday as concerns about inflation increased.
- The Conference Board’s index of leading indicators rose just 0.2% in September, its weakest monthly reading since February. Among the ten index’s that make up the overall index, six saw gains.
Stocks stateside start this week with three major US indices having reached new record highs over the course of last week. The Dow Jones Industrial Average closed at a record high of 35,677.02 last Friday. Less celebrated in the weekend press was the S&P 400 (mid-cap stocks) which closed at its respective record high on Friday of 2,796.84. On Thursday the S&P 500 closed at its latest record high of 4,549.78.
We should note that the S&P 600, the Russell 2000 and the NASDAQ last reached their respective record highs on June 8, March 15 and September 7 of this year. On the week the Dow Jones Industrial Average, the S&P 500, the S&P 400 (Midcaps), the S&P 600 (small caps), the Russell 2000 (small caps) and the NASDAQ
Composite (some 40% weighted in technology or tech-related stocks) on the week respectively gained: 1.08%, 1.64%, 1.77%, 1.26%, 1.13% and 1.24%.
On a year-to-date basis these same six indices are up respectively: 16.57%, 21%, 21.25%, 23.43%, 16.02% and 17.08%.
The best performance among the six aforementioned benchmarks is the S&P 600 (small caps) up some 23.43% year-to-date which is often overlooked by observers and even many investors when comparing relative performance of market capitalizations. The worst performer among the six sectors is the Russell 2000 (small caps). Issues of quality among its components are likely the reason for the performance disparity between the two small cap benchmarks.
The relative performances of these indices in our view suggests to us that institutional and private investors are likely seeking broad diversification among stocks rather than just piling into one or two or even three major indices. These six indices in aggregate after all represent broad exposure within sectors (the GICs 11 key sectors), sub sectors (industries), market capitalizations (large, mid and small) as well as style (Growth and Value).
The broad diversification represented by these benchmarks and their overall performance thus far this year suggests that investors are anticipating a successful reopening of the US economy and modest increases in fixed income yields as supply chain disruptions and labor shortages are remedied over the course of 2022.
Meanwhile back at the ranch
While US stocks moved higher last week the price of the 10-year US Treasury moved lower last week as its yield ticked higher to close the week at a yield of 1.632% after closing the day before at 1.701% or around 4 basis points lower than its high of 1.742% for this year on March 31.
Economic data pointing to stickier than expected levels of inflation tied to supply chain disruptions and labor shortages along with accommodative monetary policy and stimulus rescue programs from Washington that may have over stimulated the economy are rattling the bond market some but not yet the stock market.
Ongoing negotiations in Congress to trim the cost of the next round of policy related stimulus along with the Federal Reserve likely on the verge of starting tapering of its monthly bond buying program (as soon as next month with prospects for an upward tweak to its benchmark rate next year) could set the stage for stocks to move higher through the end of this year—notwithstanding a set-back in the economic re-opening caused by a Covid-19 variant or an unforeseen catalyst which would justify some profit taking without FOMO (Fear of Missing Out) by bears, skeptics and nervous investors.
While Congress, the Administration and the Federal Reserve move toward the next big catalyst for the market to ponder many investors will be focused on a busy week in Q3 earnings season with 164 S&P 500 companies including a brace of widely followed technology companies scheduled to report results over the course of the week. So far this earnings season, with 23.4% of the S&P 500’s companies having reported, earnings are up 46.09% on back of 16.08% revenue growth and 84% of the companies that have reported have beaten estimates.
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