November 2021 - A Rebound and a Rally

By Kyle M. McBurney, CFP

Managing Partner at Highland Peak Wealth

In a court of law, the bear market argument will always win.

Sound familiar? I promise I am not trying to boast or anything. Just cheekily reiterating an important market theme.

Like so many Octobers past, the historically turbulent month had plenty of reason to continue last month’s sell-off. There were earnings disappointments from tech giants Apple and Amazon, a measly U.S. GDP report, and plenty of noise around inflation and the Federal Reserve. Fortunately, the stock market ignored it all. In fact, it did more than just ignore the news – the stock market flourished and produced the best month of 2021. After a 5.2% decline in September, markets recovered nicely in October, with the S&P 500 returning an impressive 7.01% for the month. The tech-heavy Nasdaq did even better, up 7.29%.

Improving prospects on three fronts powered October’s rebound:

1) Excellent third quarter earnings

2) Improved (and improving) COVID-19 trend

3) Bipartisan (somewhat, anyway) infrastructure framework

Simply put, we continue to believe that the market has room to run, with the potential for a strong end to ‘21. Within a well-diversified portfolio, we continue to recommend a slightly overweight allocation to stocks and alternatives (commodities and real estate). There may be some bumps here and there, but our view remains unchanged - that market pullbacks may offer opportunities to add or diversify client portfolios.

So, What Fueled October’s Rally?

1) Strong Third Quarter Earnings

For us, this was the big one. Despite some notable misses, earnings season has thus far exceeded expectations. This helped ease fears of a slowing economy and pushed markets higher. With roughly 55% of the S&P 500 reporting in October, earnings growth is up an incredible 36% year-on-year – a big number and well above the 28% estimate.

Of course, we are fully aware of supply chain and cost pressures. Many companies see these issues sticking around through mid-2022. However, third-quarter earnings have thus far provided plenty of optimism. Consumer demand remains incredibly strong (we are all still buying a ton of stuff), and corporate balance sheets are about as healthy as they have ever been. Overall, we believe that earnings growth will remain strong as we progress through the typically bullish fourth quarter. Future earnings could look even rosier if supply chain relief is realized.

2) Improving COVID-19 Trends

Yes, the numbers are looking better and better – all over the world. And that’s before news broke of potentially game-changing antiviral pills from the Pfizer and Merck labs. According to data by the CDC, cases/deaths in the U.S. have come down dramatically from their September peaks:

From a purely economic perspective, this is obviously welcome news. A sustained decrease in COVID-19 cases supports continued economic reopening, more consumption/buying, and improved consumer confidence. That last one is especially significant. A more optimistic consumer can be a self-fulfilling prophecy. In the last week of October, we saw consumer confidence numbers, retail sales, and new home sales soar—all exceeding forecasts. If these numbers continue to improve, expect the stock market to continue its rally. (The arrival of foreign tourists this week in U.S. cities was also a welcome sign.)

3) More Stimulus?

We will likely have more on this next month, but speculation of infrastructure stimulus certainly played a decisive role in October’s rally. Towards the end of October, President Biden officially revealed a ~$1.75 trillion social spending agenda. There is still plenty of work to be done and hurdles to be cleared. But there is the promise that a substantial piece of the plan will be enacted. The bill recently approved by the house is focused on more run-of-the-mill infrastructure ($1.2 trillion). It doesn’t include some of the more debatable climate change and social safety net provisions.

It should also be noted that not all this money hits the economy at once. As is usually the case with these spending bills, they will be laddered out over many years. In fact, as you can see below, there is minimal macro impact in the near term, as spending does not truly ramp up until 2024.

Equally bullish for stocks has been the reduction of corporate tax hikes within the bill. Markets are viewing this shift as a positive development. The proposal does not include raising corporate or tax rates directly. Instead, this bill looks to focus on a 15% minimum tax on corporations, a 1% tax on stock repurchases, and potentially higher taxes for businesses earning north of $10 million in revenue. While any tax change, large or small, can be significant, it is a far cry from what was being proposed over the summer months.

There are more potential tax changes, and we will monitor it all for you.

Charts of the Month – Seasonal Strength

1) History on Side of Stock Market for Potential November and December Rally:

2) Small Cap Strength = Good for Everyone:

Allocation Update

After several changes through the summer and early fall, we were happy to maintain our overweight to stocks and cheer the rally from our humble perch. As mentioned, we still believe that this rally has legs. The data still points toward continued economic growth and improvement of economic fundamentals. Despite today’s well-known and oft-discussed concerns, especially regarding inflation, we remain optimistic as we approach year-end. Simply put, markets have more working for it than against it. Also, the TINA paradigm (there is no alternative . . . to stocks) is still alive and well. Fixed Income markets continue their struggle to provide a positive return. As such, our team will utilize the additional cash on the sidelines will be utilized to position portfolios better as we head into year-end.

Operationally, this is the time of year where we ramp up tax-loss harvesting. Of course, this is a significant focus throughout the year, but we pay extra attention in the closing months. Although a +20% rally in stocks limits loss opportunities, what can be done must be done. Every little bit helps!

One more public service announcement – this is an excellent time of year to organize/execute end-of-year gifting, charitable donations, and tax planning. For those who have or are considering a Donor Advised Fund (a fantastic way to accomplish your philanthropic endeavors), we have a few more weeks to get it done. Because of the end-of-year rush, we highly recommend that everything be put in place by early December. Our team stands by, ready to help.

With the benefits of remote work, the McBurney family will be hitting the road next week, getting a jump on Thanksgiving travel and heading south. We are leaving a few days early to visit my twin brother in beautiful Roanoke, Virginia. Teddy will get the chance to spend time with his cousin (three weeks younger) and enjoy some gorgeous fall hikes. It is a beautiful time of year down there. More importantly, however, is the chance to introduce ourselves to our new niece, Millie McBurney – a happy and healthy girl born last month. I have no doubt she will be ruling the McBurney roost in no time.

From our family to yours, we wish you a warm and happy Thanksgiving. Thank you all for your kindness and trust. May our collective diets start in January.

Speaking of diets -

“Vegetables are a must on a diet. I suggest carrot cake, zucchini bread, and pumpkin pie.”

Jim Davis (Creator of Garfield)

As always, questions and comments are welcome.

Kyle M. McBurney, CFP®

Managing Partner

The opinions expressed herein are those of Kyle McBurney, CFP as of the date of writing and are subject to change. This commentary is brought to you courtesy of Highland Peak Wealth which offers securities and investment advisory services through registered representatives of MML Investors Services, LLC (Member FINRA, Member SIPC). Past performance is not indicative of future performance. Information presented herein is meant for informational purposes only and should not be construed as specific tax, legal, or investment advice. Although the information has been gathered from sources believed to be reliable, it is not guaranteed. Please note that individual situations can vary, therefore, the information should only be relied upon when coordinated with individual professional advice. This material may contain forward looking statements that are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Referenced indexes, such as the S&P 500, are unmanaged and their performance reflects the reinvestment of dividends and interest. Individuals cannot invest directly in an index. CRN202411-1206569