Watch the CPK Market Action Report: October2021
Equity markets closed out the third quarter with a noticeable selloff. Are rising bond yields and US dollar an indication of more selloff to come or will equities persevere and once again live up to their historical reputation of providing us with a strong 4th quarter performance?
Watch the Market Action Report now:
October 2021
INTRO TAG
Equity markets closed out the third quarter with a noticeable selloff. Are rising bond yields and US dollar an indication of more selloff to come or will equities persevere and once again live up to their historical reputation of providing us with a strong 4th quarter performance?
That action starts, NOW!
INDEX PERFORMANCE RECAP
The major indices ended their quarter long stretch of volatility with a solid selloff this month erasing all gains since mid-July. The Dow Jones Industrial fell 3.00% and S&P dropped 3.79%. Meanwhile, the tech heavy Nasdaq led the pack falling 4.85%
EQUITY UPDATE
Last month I voiced concern over how much higher equities could go without having to take a breather. Ultimately, I raised the cash percentage in our models to reflect that concern. That move happened to be a wise one. It seems the real threat to this bull market is that it is priced to perfection with a 20x multiple and 2022 expected earnings of $220 which equates to a value of about 4,400 in the S&P 500.
Given the number of companies out there that are providing us with warnings of earnings reports that may be lower-than-expected, there is a growing concern that 2022 earnings could be cut from $220 to $215 or even $210. If this happens in combination with a rise in the 10yr to around 2% and we get an increase in corporate tax rates, this could create a ceiling for the S&P 500 of around 3900 in a worse case scenario. This equates to another 10.5% decline from our recent close at month end. Now, keep in mind, we started the year at 3760. So, a selloff of this magnitude is not the end of the world as the index would still be up for the year. However, it would clearly be something we would want to try to avoid if possible.
BOND UPDATE
Treasuries continue to rise. As of October 1st, the rally in the 10yr Treasury has paused at the key resistance level of 1.54%. If it can materially breakthrough this level, I would expect it to hit its March high of 1.74% and most likely move beyond that level. If this occurs, we should not see a material breakdown in the equity rally so long as the economic recovery remains solid. However, this would likely create a similar environment of outperformance to that of Q1 for financials, resource stocks, energy, commodities, industrials and materials.
COMMODITY UPDATE
Crude oil had a nice gain of just over 10% to mark a new high closing for the year at $75.74. The effects of hurricane Ida to energy operations largely subsided and ultimately resulted in a sizable build in inventories at month end. The rise in production should continue along with refinery runs and result in a return to high correlations trading across the energy markets.
Copper produced another choppy month, closing lower by 2.51% at $4.20. The line in the sand to watch is $4.00. Any further weakness or a break below the $4.00 level would suggest that broad market volatility is looming.
Gold continued its recent decline dropping another 3.17% to $1757.90/oz and hitting its lowest level since March. If the yellow brick continues to face strong headwinds from a rise in the US Dollar and Treasury yields, the outlook will become even more bearish.
CURRENCY UPDATE
After months in a $91-$93 trade range, the dollar rallied to a fresh 14-month high this last week thanks to continued momentum and dovish commentary from ECB President Lagarde. The recent volatility in stocks and comments from our Fed looking at inflation as not so “temporary” has also provided support for this breakout. The dollar index closed just above $94 for the first time since July 2020. While I don’t argue with the reasoning behind this rise, I am not inclined to suggest the dollar is embarking on a material move higher.
ECONOMIC UPDATE
Business spending remains solid and that is an important tailwind for the economic recovery. Recent market reaction reflected that optimism as the Durable Goods number helped push yields to 1.52% giving a brief boost to cyclicals and value sectors.
THE WRAP
The fact is, equity markets are a bit overstretched and have been struggling to find a catalyst to move even higher for a while. Even with Covid cases on the decline, strong economic data and the unlikelihood that Democrats will pass their $3.5 trillion spending bill before year end, we are not in the “all clear” zone. As I stated earlier, equity markets are still priced to near perfection for 4th quarter earnings releases. With interest rates rising ahead of any Fed action and companies warning of potentially lower than expected earnings reports, I am quite comfortable in taking a more cautious approach towards finding growth for the time being.
CPK FOCUS
For the month of October, our cash allocation remains at 30% for some of the models while we increased others to just over 40% due to their more aggressive nature. Our broad focus remains on Domestic Equities and Commodities.
For Domestic Equities, our attention remains with just Small Cap Growth and Mid Cap Growth with an emphasis on the Consumer Cyclicals, Technology, Industrials, Financials and Real Estate.
As for Commodities, our focus remains on Energy and Industrial Metals.
CPK DISCLAIMER
As a reminder, my current allocation is not a recommendation. Regardless of what happens next, investors like you need to have a simple and yet solid financial plan that reduces RISK, COSTS and TAXES while securing the necessary income you need to maintain your lifestyle throughout retirement.
If you don’t have a plan OR you’re not comfortable with the plan you have, call me today to get pointed in the right direction.
I’m Chad Kunc and that puts a wrap on the October 2021 Market Action Report. In honor of National Sons Day this last week, I have a little something special for you to close out the show. Thanks for joining me. It’s time for me to get back to the markets.
For this guy, that action starts, NOW!