This Month's Newsletter

November is an opportunity to gather with friends and family and be thankful - and to gobble down an extra helping of green bean casserole!

The stock market bounced back nicely in October after a really bumpy September, jumping 7.01% (S&P 500). What drove the rebound? Better-than-expected earnings for starters!

Companies like Microsoft, Goldman Sachs, Google, Chevron, and Chipotle posted stronger-than-expected earnings last quarter. Earnings represent how much money a company made in the quarter and are a major factor in the company’s stock price. When earnings ‘beat’ expectations, that’s like over-delivering on how much money it’s expected to make. And Wall Street likes that!

Many of the largest companies beat earnings last quarter, which helped push stock prices up in October. Unfortunately, Amazon wasn’t one of those companies. The supply-chain issues plaguing companies everywhere hit Amazon particularly hard.  In a quarterly earnings call, new CEO Andrew Jassy noted that increased labor costs, shipping costs, and supply-chain issues all weighed on the company’s profitability.

The state of the global supply chain remains in focus for both Wall Street and Washington, DC. As lawmakers continue to debate the Biden Administration’s proposed spending package, supply-chain issues remain in key spots like the Port of Los Angeles. While the Administration did convince the Port to begin round-the-clock operations, trucking and freight remain under pressure, contributing to delays as we enter the critical holiday season.

Stocks

Stocks roared back in October, with all three major indices posting strong enough returns to eclipse last month’s modest pullback.

Energy stocks continue their stellar performance in 2021, up 10.36% for the month and 58.07% year-to-date, as of October 31! Financials and Real Estate continue their strong 2021 campaign, both outperforming the broad S&P 500 Index for the month.

The Materials, Utilities, and Consumer Staples sectors continue to lag the broader market despite a strong month from all three. Notably, the Materials sector did well last month as demand increased for commercial products like paint, chemicals, metal, and paper, pushing YTD performance into double-digits.

Bonds

Bond performance remains muted in 2021 as the market awaits the Fed’s taper decision. Since March 2020, the Fed has aggressively purchased assets on the open market, leading to lower interest rates. Interest rates are expected to rise if the Fed decides to reduce its bond-buying.

Historically, rising interest rates lead to lower bond prices, which can mean a lower total return.

Economic Update

The state of the global supply chain remains in focus for both Wall Street and lawmakers in Washington, DC. What could be causing the slowdown?

Back in the 1980s, manufacturing companies adopted an approach called “just-in-time” inventory management. Just-in-time (“JIT”) calls for the necessary raw materials or parts to be delivered to the factory just before production must begin to fulfill orders on time. By reducing the amount of excess material on hand, companies can reduce waste, control costs, and better forecast revenue.

The Toyota Motor Company pioneered JIT in the 1970s. The company’s success led to the rapid spread of JIT principles to industries worldwide. It helped create the deeply interconnected global supply chain we have today.

Now, JIT works great if supply-chain disruptions are minimal. Because the company has to supply customers with what they want, when they want it, and spend as little money as possible to make it happen, any disruption to the supply chain can quickly lead to negative downstream effects. For example, in 1997, a catastrophic fire at one of Toyota’s auto-parts suppliers forced the company to stop production across the supply chain, costing the company billions in revenue.

The lockdowns used to control the coronavirus pandemic forced companies to shut their doors, some of them forever. As the pandemic eases, the surviving companies across the supply chain need to resume operations. That can mean tackling a list of logistical issues like rehiring workers, renegotiating contracts, and locating new supplier or purchaser relationships – alongside actually manufacturing and shipping an item.

As long as the world runs on time, JIT can leverage a highly interconnected supply chain to deliver what you want when you want it for a reasonable cost. The pandemic disrupted supply chains worldwide, forcing companies to play catch-up. As a result, some experts now expect supply-chain issues to persist through 2022.

With the holiday season upon us, it might be a good idea to consider purchasing gifts now!  

Outlook

Here’s what we’re watching in the month ahead:

Federal Reserve comments. The Federal Reserve is expected to begin tapering its asset purchases in November. We’ll be watching to see how the market reacts. If Chairman Jerome Powell has correctly messaged the move, the market may take it in stride.

Jobs Report. The unemployment rate continues to fall, which is good; however, quits continue to rise, puzzling many in what’s being called 'The Great Resignation'. A falling unemployment rate and a rising hire rate heading into the holiday season can be a bullish signal for Wall Street.

Progress on Biden Administration’s proposed spending plan. Lawmakers are deep in negotiations over every facet of the proposed bill. Despite some contentious rhetoric, Congress has a habit of passing legislation at the 11^th hour. It remains likely that some version of the plan will pass before the year is done.