November 2021 – Market At a Glance

October is called a Jinx Month and also a Bear Killer. This year, the month for most Libras was a mini-bear killer. In September, the U.S. equity market declined about 5%, not exactly a bear market, but still a down move. The stock market reached the nadir on the second trading day of October. The equities staged a turnaround the day after and did not look back for the remainder of the month. Now we are heading towards the primary month for Scorpios, November, with an improved outlook.

Seasonal: November Historically Better For Equities

November is typically one of the top-performing months for stocks. According to Stock Traders Almanac, it is the second-best performing month for S&P 500, the third-best for Dow Jones Industrial Average (DJIA), NASDAQ Composite, and Russell 2000, and the best month for Russell 1000 since 1950 in the post-election years. In the past 17 post-election years (2021 is a post-election year), S&P 500 has been up 13 times and DJIA 14 times in November.

November’s performance is even better during other years. It has ranked as the best month for S&P 500, Russell 2000, and Russell 1000K and second-best for DJIA and Nasdaq Composite since 1950. The Almanac notes that usually, there are eight bullish days in November, i.e., days when the stock market advances, with NASDAQ and Russell 2000 showing more strength in the early trading days. On other November trading days, the market tends to move sideways or down, giving back some gains.

Of course, November could also be pretty bad for the stocks. During the 2008 financial crisis, S&P 500, NASDAQ Composite, and Dow Jones Industrial Average declined between 11% to 12% in November. Russell 200 was down by more than 18%. NASDAQ Composite fell more than 22% in November 2000 following the dot-com bubble burst. Nevertheless, the seasonality effect makes November a good month for stocks.

Economy: Looking Good

Fig. 1: Employment, Retail Sales, Industrial Production, and Income

The U.S. economy continues to improve, though the pace has somewhat slowed down, which is natural as the growth rate earlier in the year was higher due to the comparison with the year-ago economic data that was weakened by the Coronavirus pandemic.

The year-over-year growth rates for employment, industrial production, retail sales, and personal income are lower than in April but still relatively healthy (see Fig. 1). They are gradually stabilizing around the levels that were prevalent before the pandemic.

Labor Market Getting Healthier

The Unemployment Claims and the four-week moving average have dropped under the 300K level. The continued unemployment claims number decreased by nearly half a million to 2.8 million. These numbers paint a picture of improving labor market conditions, which consumer sentiments corroborate; more about it a few sections later.

GDP Growth Slowing But No Stagflation

Fig. 2: Misery Index – Unemployment Rate + CPI

On October 26, the Bureau of Economic Analysis released a weaker than expected Advanced Estimates for the Q3 real GDP.  The second-quarter GDP increased by 6.7%, but the estimates for the third-quarter GDP fell to 2.0%, below the consensus estimate of 2.6%, already lowered from earlier forecasts.

The specter of weaker than expected real GDP and hotter inflation has raised the fears of stagflation. However, the GDP is not stagnant; only its growth has become sluggish. The BEA attributes this deceleration of real GDP to a slowdown in personal consumption expenditures (PCE), Federal Reserve’s preferred inflation gauge.

The global supply-chain blockage is a significant headwind for growth and a substantial tailwind for inflation. Both – headwind and tailwind – will be eliminated once the supply-chain bottlenecks are removed.

Out goto Misery Index chart from Fed briefly spiked in June 2021, but since then, it has declined. The current levels are much below the levels seen during the stagflationary days of the 1970s (see Fig, 2).

Taken together – PCE slowdown, supply-chain causing slower growth and higher inflation, and subdued Misery Index – we believe that the concerns for stagflation are overblown.

Global Economy Moving On

The IMF’s October 2021 World Economic Outlook estimates the global economy to grow by 5.9% in 2021 and 4.9% in 2022. The growth is expected to moderate to about 3.3% over the medium term. The balance of risk is tilted to the downside.

Inflation Remains Elevated

Fig. 3: CPI and PCE

The inflationary pressures continue to be elevated. In September, the Consumer Price Index (CPI) for all items was up 5.37% from the year-ago level, and the Core CPI (excluding food and energy) was up 4.03% from the year-ago level. The headline CPI is still rising, though the Core CPI has declined from June (See Fig. 3). The Fed’s preferred inflation indicator, Core Personal Consumption Expenditures (PCE), has also dropped in April but is still relatively high.

The global supply-chain blockage is the main driver behind increasing inflationary pressure around the world. However, the economists are predicting that they will ease. The IMF’s baseline forecast for advanced economies shows headline inflation peaking at 3.6% in the fall of 2021 and declining to about 2% by mid-2022. For emerging and developing market economies, inflation is projected to peak at 6.8% this fall and decline to 4% next year.

Monetary: Q.E. Ending But No Tightening

It is almost a foregone conclusion that the Federal Reserve will announce a decision to taper its bond-buying program in the November 2021 meeting. It is also highly likely that taper would begin in December. A monthly purchase reduction of $15 billion would get the monthly purchases down to zero by July 2022. We covered the forthcoming tapering and the chances of rate increases earlier.

The bond market has also penciled in at least one rate hike, if not two, in 2022. The discounting mechanism of the equity market is working well, and its price levels reflect a quarter-point rate hike in 2022. Economic conditions are giving signals that more than that may not be possible next year.

Technical: Equities Look Strong

The U.S. Equities On The March Again

Fig. 4; Major U.S. Indices

The major U.S. indices have again started to post all-time highs. The Dow Jones Industrial Average ($INDU) broke above its previous high on October 20, when it moved above a Horizontal Channel (see the First Panel, Fig. 4). The 61.8% Fibonacci Target of the Horizontal Channel pattern is near 36,815, and the 100% extension target is near 37,540.

The S&P 500 ($SPX) made its new high on October 21. It made a smaller Double Bottom pattern in late September and early October (see the Second Panel, Fig. 4). The index has already achieved the pattern’s 61.8% Fibonacci extension target of 4576.00. The 100% and 161.8% extension targets are around 4645.00 and 4760.00, respectively.

The tech-heavy NASDAQ Composite made its new high after breaking above a Horizontal Channel on October 28 (see the Third Panel of Fig. 4). The 61.8%  Fibonacci extension target of the pattern is near 16,160 and the 100% extension target is near 16,625.

Two broader market indices, NYSE Composite ($NYSE) and Wilshire 5000 Total Market Index ($WKSH), have also made new all-time highs after breaking above bullish chart patterns (see the Fourth and the Fifth Panels, Fig. 4)

The Global Equity Markets Lagging

Fig. 5: Some Global Indices

The global equities are lagging behind the U.S. equities. The MSCI World (ex-USA) Index ($MSWORLD) made an all-time high in early September like many other U.S. equity indices. It is still slightly less than 2% below that high (see the First Panel, Fig. 5).

The chart of the MSCI EAFE Index ($MSEAFE), the developed market index, looks similar to that of $MSWORLD (see the Second Panel, Fig. 5). The EAFE index is below its all-time high by slightly more than 2%.

The MSCI Emerging Markets Free Index ($MSEMF) is faring worse. Since early October, it is also rising after making a Double Bottom pattern (see the Third Panel, Fig. 5); however, it is more than 11% off from its all-time high made in February 2021.

Two major emerging market economies are diverging slightly. India’s Mumbai Stock Exchange ($BSE) has been trending up since March 2020, similar to S&P 500 in the USA. It made an all-time high on October 19 (see the Fourth Panel, Fig 5). The Shanghai Stock Exchange ($SSEC) is off its all-time high made in February 2021 by nearly 4.5% (see the Fifth Panel, Fig. 5).

Fundamental: Corporate Earnings Continue To Propel Stocks

By this time in the Q3 earnings season (October 22, 2021), more S&P 500 companies are beating the consensus EPS estimates than average. Also, more companies are reporting higher earnings than the forecast at the end of Q3.

The blended earnings growth rate for S&P 500 firms for Q3 2021 is 32.7%, the third-highest year-over-year growth rate in over a decade (Note: blended number is a combination of the actual numbers reported by companies and the forecast for the companies yet to announce). The estimate for the earnings growth was 27.5% at the end of Q3. The blended year-over-year revenue growth is 15.3% compared to the forecast of 14.9% at the end of Q3. If the final revenue growth turns out to be 15.3%, it will be the second-highest since 2008.

Analysts now expect earnings growth of more than 20% for Q4 and more than 40% for the entire year. The increase in earnings and revenue growth rate is due to multiple factors, including higher Q3 earnings and comparison with weaker earnings and revenue a year ago due to the negative impact of the Coronavirus pandemic.

Companies With Greater International Exposure are Outperforming

Fig. 6: S&P Earnings Growth By Regions

S&P companies that generate more than 50% of revenue outside of the U.S. are doing better than those that get more than 50% of revenue domestically. Approximately 40% of the aggregate S&P revenue comes from the global markets Ex-US and 60% from the U.S. markets.

The EPS growth is 26.3% for companies with greater domestic exposure and 44.3% for greater international exposure (see Fig. 6). The year-over-year revenue growth rate for these two groups are 12.4% and 23.8,% respectively.

At the company level, Alphabet, Apple, Chevron, and Exxon Mobile are the most significant contributors for companies with greater international exposure. Excluding them, the blended earnings growth would fall to 29.9% from 44.3% for this group.

Increased Earnings Growth Rate Is Due To Multiple Sectors

The blended year-over-year earnings growth rate for Q3 is 32.7%, mainly due to the earnings surprises by companies in the Information Technology, Health Care, Financials, and Communications Services sectors. The positive revenue surprises of the Energy and Health Care companies enabled the Q3 blended revenue growth rate of 15.3%.

Earnings Growth in Near Future is Projected to Slow Down

Fig. 7: Earnings Growth 2022

For Q4, analysts are forecasting earnings growth of 22.4% and revenue growth of 5.3%. The projections for Q1 2022 are 6.2% and 8.6%, respectively. The estimates for the year 2022 are 9.0% and 6.8%, respectively.

The Industrials sector is estimated to lead the earnings growth in 2022, followed by Consumer Discretionary and Energy (See Fig. 7). Financials, Materials, and Health Care are forecasted to be laggards.

One of the reasons for the projected slow down of earnings growth rate is that the growth rate in 2022 will not benefit from comparison with the weaker year-ago earnings and revenue numbers in 2020 and early 2021.

Forward Valuation Is Above Average

Fig. 8: Forward 12-Month P/E Ratio

The forward 12-month P/E ratio is 21.0, higher than the estimates of 20.1 at the end of Q3. The forward P/E ratio is above 5-year and the 10-year average of 18.3 and 16.4, respectively.

The two sectors with the highest forward P/E ratios are Consumer Discretionary (30.9) and Information Technology (26.6), while Energy (13.0) and Financials (15.0) sectors have the lowest ratios (see Fig. 8).

Since the end of Q3, the S&P 500 index has advanced by 5.6%, while the forward 12-month EPS increased by only 1.2%. The trailing 12-month P/E ratio is at 26.8, above the 5-year average and 10-year average or 22.8 and 19.7, respectively. The analysts are penciling in a bottom-up 12-month price target near 5075.00, about 11% above the price level at the end of October.

Psychological: Sentiments Improving

Retail Investors More Bullish

The latest AAII Sentiment Survey of its members, the retail investors, reports bullish sentiment exceeding the historical average. The bullish sentiment – investors expecting the stock market to rise over the next six months stands at 29.8%, slightly above the historical average of 38.0%. The bearish sentiment – expectations that stock prices will fall over the next six months – is at 29.4%, below the historical average of 30.0%. The neutral sentiment, expectations that the stock market will remain unchanged over the next six months, rose to 30.7%, below the historical average of 31.5%.

The top factors that are influencing the investment decision that the survey participants noted include inflation (28%), government and consumer spending (22%), and supply chain (13%).

At extreme readings, this AAII Sentiment gauge works as a contrarian indicator, but at other times, it provides signs for the market’s future direction. The current survey readings are not extremes.

Business and Consumer Sentiments

Fig. 9: C.B. Consumer Confidence Index

The Conference Board Consumer Confidence Index increased in October following a three-month decline (see Fig. 9). It now stands at 113.8 from 109.8 in September.

The Present Situation Index — consumers’ assessment of current business and labor market conditions —improved to 147.4 from 144.3 last month. The Expectations Index — consumers’ short-term outlook for income, business, and labor market conditions —rose to 91.3 from 86.7.

Consumers are more optimistic about the short-term labor market outlook and are more positive about their short-term financial prospects. Their short-term business conditions outlook was mixed in October as 24.% expect conditions to improve and 21.1% expect them to worsen.

The University of Michigan Consumer Sentiment has increased for the past three months after a sharp decline in August 2022. The Surveys of Consumers chief economist, Richard Curtin, writes that the Delta variant, supply-chain shortages, and reduced labor force participation will continue to slow the pace of consumer spending in 2022.

Market Breadth and Other Contrarian Indicators

Fig. 10: CBOE Put / Call Ratio

The CBOE Put / Call ratio compares the total number of put options (bearish outlook) traded each day with the number of call options (bullish outlook) traded each day. A reading above 1.0 means that more put options are traded than call options, suggesting a greater bearish sentiment in the market. A rising ratio indicates that the bearish sentiments are increasing, and a falling ratio implies that the bullish sentiments are growing. Like all sentiment indicators, it becomes a contrarian indicator at extremes.

The CBOE Put/Call ratio was at 0.8 on October 26 (See Fig. 10). Since early October, it has been falling after mostly rising from June 2021, hinting that the bullish sentiments are inching up in the market.

Fig. 11: NYSE New High / New Low Ratio

The NYSE High-Low Index is a market breadth indicator that shows the strength or weakness of a particular index. It uses new 52-week highs and 52-week lows. A reading above 50 is bullish and means that more stocks are reaching 52-weeks highs than 52-weeks lows. Typically a reading above 70 means the index is in a strong uptrend, and a reading below indicates a strong downtrend. The index is below ten on October 27 after rising from near zero in August (see Fig. 11), implying that the bullish sentiments are increasing again.

Few other contrarian psychological indicators are also suggesting that the market sentiments are either bullish or neutral. The Investor’s Intelligence Advisors Sentiment Survey reports that 48.9% of advisors are Bullish, up from 40.4% in early October. The Bearish advisors are at 23.8%. The overall sentiments seem to be neutral. The Margin Debt is at 38.02%, down from above 71% in March when the S&P 500 was 13% lower. The optimism runs rampant when this indicator reaches above 55%, increasing the chance of a market reversal, which is not the case now.

Summing Up

Seasonally, November begins a better period for the equity market. There is a strong possibility that it could live up to its reputation this year, and we may see a healthy year-end rally in the stocks.

The Technical Analysis informs us that major U.S. equity indices are on the verge of breaking above their previous highs. Some are coming out of bullish chart patterns and can rise by 5-10% over the next few months. Weekly new highs are trending higher, and the Advance/Decline lines are improving too.

The economy is still humming along, the labor market is healthy, but the real GDP growth rate is decelerating slightly. The Inflationary pressures are increasing, yet economists feel they will subside once the supply-chain issues are addressed. A moderate level of inflation is also good for equity markets.

The Federal Reserve feels confident about the economy and is getting ready to start tapering its bond purchasing program, though we don’t think it is prepared to raise the Fed Funds rate yet.

The fundamental picture – corporate earning – is also looking good. More companies are beating the consensus estimates of analysts than average. The Q3 earnings and revenue growth rates are third and second highest in over a decade, respectively. The psychological out is improving, and more consumers feel confident about the labor market conditions and wages.

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