by Clare Market Investments on Nov 3, 2021
Monthly Market Summary
- The S&P 500 Index generated a +7% total return during October, outperforming the Russell 2000 Index’s +4.3% return.
- Consumer Discretionary was the top performing sector, returning +12.1% as Tesla gained 40%. Energy’s +10.3% made it the second-best performing sector.
- Communication Services was the worst performing sector during October, declining -0.2% as Facebook (temporarily) traded lower.
- Investment grade bonds generated a +0.5% total return, outperforming high yield bonds’ -0.3% total return.
Economic Data Provokes Stagflation Debate
Covid cases continue to decline as delta variant fades, but the pandemic is leaving lasting economic effects. Supply chains are strained as strong demand overwhelms reduced production capacity and stressed shipping networks. Inflation in certain sectors remains stubbornly high, resulting in price increases across food, clothing, appliances, and other everyday items. In the commodity markets, WTI oil rose +10.9% during October as demand increased and oil production lagged. The Commerce Department’s preliminary GDP estimate indicates the economy expanded at a +2% annualized pace during the third quarter. This was a punctuated slowdown from the +6.3% and +6.7% recorded during the first and second quarters, respectively, earlier this year.
The current economic environment is fueling a stagflation debate. Stagflation is defined as a period of high inflation, high unemployment, and slow economic growth. The term originated in the 1970s but was rarely used over the past decades. Stagflation talk increased in recent months as the above-mentioned supply chain issues, rising energy prices, and inflation pressures led to concerns about slower economic growth. Slower third quarter GDP growth merits a closer look at the data.
So, are we headed for stagflation?
The U.S. economy has not experienced many stagflation periods. While historical precedent is limited, current economic data has not deteriorated to a level consistent with stagflation. The 3Q rate of GDP growth slowed but remained positive. The Federal Reserve recently upgraded its 2022 and 2023 GDP growth estimates, indicating it views the current economic environment as temporary. Consumer price inflation rose +5.4% year-over-year during September, but recent month-over-month trends show inflation is below the high levels experienced earlier this year. Labor market data suggests the 4.8% unemployment rate is related to lower labor force participation and voluntary quits rather than layoffs. The question is how quickly the economy can get back to normal. In our view, supply chain, inflation, and labor market pressures will ease over the next 12 months and the market’s stagflation fears are overblown.
Clare Market Investments, LLC is a Registered Investment Advisor. This material is for informational purposes only. It is not intended as and should not be used to provide investment advice and is not an offer to sell a security or a recommendation to buy a security. This summary is based exclusively on an analysis of general market conditions and does not speak to the suitability of any specific proposed securities transaction or investment strategy. Judgement or recommendations found in this report may differ materially from what may be presented in a long-term investment plan and are subject to change at any time. This report’s authors will not advise you as to any changes in figures or views found in this report. Investors should consult with their investment advisor to determine the appropriate investment strategy and investment vehicle. Investment decisions should be made based on the investor’s specific financial needs and objectives, goals, time horizon and risk tolerance. Except for the historical information contained in this report, certain matters are forward-looking statements or projections that are dependent upon risks and uncertainties, including but not limited to such factors and considerations such as general market volatility, global economic risk, geopolitical risk, currency risk and other country-specific factors, fiscal and monetary policy, the level of interest rates, security-specific risks, and historical market segment or sector performance relationships as they relate to the business and economic cycle. See claremarket.com for additional information and disclosures. © 2021 Clare Market Investments, LLC
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