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Rally Returns — Week of November 1, 2021

Written by Steve Orr, Chief Investment Officer, and Greg Kalb, Investment Advisor

index wtd ytd 1-year 3-year 5-year index level
S&P 500 Index 1.35 24.03 42.87 22.52 18.89 4,605.38
Dow Jones Industrial Average 0.40 18.77 37.63 16.12 17.16 35,819.56
Russell 2000 Small Cap 0.27 17.18 50.32 17.31 15.55 2,297.19
NASDAQ Composite 2.72 20.89 41.87 31.26 25.72 15,498.39
MSCI Europe, Australasia & Far East -0.10 11.54 33.01 12.78 10.40 2,335.53
MSCI Emerging Markets -2.18 -0.15 15.49 13.49 9.79 1,264.75
Barclays U.S. Aggregate Bond Index 0.52 -1.58 -0.79 5.48 3.11 2,354.21
Merrill Lynch Intermediate Municipal 0.08 0.25 2.03 4.77 3.07 317.96

As of market close October 29, 2021. Returns in percent.

Rally Returns

A strong October is in the books for stocks. Heading into Friday’s close, this is the best October performance since 2015 and the best month for the S&P 500 since last November. Friday’s month-end clean-up did finish with a whimper but does not dent the Bull thesis. Most of the major indices’ dips this year have been around monthly options expiration. That week would see stocks start weak and drift lower, usually down 3% to 5%. September into October broke the pattern: the same 5% dip but stretched over a more typical six-week span. Earnings season has kicked the S&P 500 and Dow Industrials back to new highs. 

Only Small Cap, Utilities and Transports have not broken out of their consolidations. Transports are close to breaking out; we are pleasantly surprised at shipping and rail results. Despite labor shortages and fuel costs, the Dow Transports have jumped over 13% in October. Internals of the markets are getting back in gear. The percentage of stocks above their 20- and 50-day moving averages are on the rise. The NYSE Advance-Decline line is trending higher. The market rally appears in gear, how about the major drivers?


Valuation has been a sore point for many investors. Price to Earnings and Price to Sales ratios can suggest future returns over a decade horizon. Price to earnings ratios traditionally ranged from 15 times earnings to 20 times. Lots of variations and adjustments surround P/Es, but the recent experience of 22 to 25 times P/Es makes some of us investors a bit nervous. However, if you pull out the top five stocks in the S&P 500 (MSFT, AAPL, AMZN, GOOGL, TSLA), the index P/E is closer to 18 times earnings and very close to long-term averages. 

P/Es are useful over a long horizon; in the very short-term, market sentiment surveys can suggest how traders are feeling now. Sentiment swings from fear (bearish) to greed (bulls!) and back. Retail sentiment has a good contrarian track record: When retail is cautious, consider buying. When they are greedy, sell them all the widgets you can grab. September’s sentiment readings were unusual because despite a very mild 5% dip in markets, sentiment dropped well into correction territory, close to the depths of last March’s 30%-plus drop. Such a quick negative response makes us wonder if there is still a large contingent of folks day-trading at home. Regardless, sentiment is like a coiled spring; push it down and it can push markets higher. 

Markets trend about two-thirds of the time and being on the right side of the trend should be every investor’s goal. The major stock indices have been above their 200-day moving averages since the middle of last year. Twenty-one-day (one month) averages are turning above 50-day averages, as shares erase their September slog. The one exception is the Emerging Markets index, which crossed below the 200-day average back in July. Last Friday the EM index fell below its 21- and 50-day moving averages, suggesting that at least in the short-term, the outlook for those countries is weakening. China represents some 30% of the index and the Hang Seng index is 17% below its February high. 

Valuations are fair, sentiment is recovering toward bullishness, and most stock markets are solidly in uptrends. Surely there is something to worry about.


Traders, like most humans, do not process information in straight lines. Since early this year, central banks have repeatedly said they would remove stimulus programs and stop bond-buying programs. Finally last week the pits took notice, and their new worry is that central banks may raise rates too quickly and slow the global recovery. This new realization pushed estimates of the first interest rate increase by the Fed to next July from early December. Traders also pushed bond prices slightly lower; most returns for bonds were flat to slightly negative in October. 

One of several catalysts last week was the rise in Australia’s inflation numbers. The Royal Bank of Canada ended its bond-buying program and Bank of England made noises last month over ending their program. Now come the Fed meeting and press conference on Wednesday. Consensus expectations are for the Fed to announce that they will lower their bond purchases by about $15 billion per month starting in January. We expect there will be qualifying language that gives the Fed flexibility on how fast and how much. If inflation moderates later in 2022, expect the Fed to wind down their bond buying in ten months. 

We would stress, like Chairman Powell, that the bond buying program and interest rate increases are two separate “programs.” The bond buying program is designed to place excess reserves of cash into the banking system. Interest rate levels should throttle up and down the creation of credit, although there is great debate on that topic. Bond and stock markets are focused on Wednesday’s press conference for clues as to how fast the Fed may move on either program. 


Third quarter GDP proved to be a delta downer, rising only 2%. That is the smallest growth in the economy since the recovery began. Delta did weigh on consumer spending, but blame must also be placed on less fiscal stimulus, supply chain headaches and higher prices. All those problems have solutions. High frequency data suggests consumers are rebounding, supply chains are on the mend and, thankfully, the delta variant cases are declining here in the U.S. 

Consumer spending in the quarter rose only 1.6%, dragged down by falling auto sales. Vehicle output fell by an amazing 41.6% annual rate. Dealer lots look barren to us, so we believe the numbers. Real final sales to domestic purchasers, a GDP statistic that removes foreign trade, fell to +1.1%. Real GDP, final sales and consumer purchases below 2% would normally have us concerned. When that group falls below 2%, they are a reliable recession forecaster. Here, however, we have jobless claims falling, ample liquidity, strong order books and consumer demand. We have little doubt that the Ford and Chevy trucks stored waiting for chips also have buyers waiting.  


Over one-third of the S&P 500 has reported earnings. Eighty-five percent of those reporting have beat analyst estimates. Earnings for the group are 30.7% higher than year-ago levels. Supply chains continue to be an issue, but managements are saying they are handling them. Costs are rising, which will pressure profit margins. Returns should in turn be pressured, but markets seem to be discounting margin squeezes and looking ahead to good earnings in the fourth quarter and 2022. The big tech firms all registered excellent earnings last week but gave uniformly cautious outlooks now that more users (viewers?) are returning to work. One-hundred-sixty-eight S&P 500 members report this week. Notables include Clorox, Diamondback Energy, DuPont, CVS and Berkshire Hathaway. 


November historically is one of the best months of the year for stocks. According to our trusty Stock Trader’s Almanac, since 1950 November is #1 in performance for the S&P 500 and #2 for the Dow Industrial and NASDAQ. Returns average around 1.5%. 

Interest rates should continue to drift higher. The Fed’s announcement will be parsed for clues on (1) inflation – when will the Fed raise short-term rates, and (2) timing and pace of bond buying reductions. Fuel shortages, housing and food costs will add at least 1% to CPI, keeping it near 4% for the next several months. Six weeks of declining jobless claims should translate into at least 400,000 new jobs in the payroll report on Friday. The Recovery Race between vaccines and virus was never going to be a straight line. The third quarter showed that delta can easily drag economies back down. We are certain the battle is not over, but the good guys do have the upper hand. 

Steve Orr is the Executive Vice President and Chief Investment Officer for Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts in Economics from The University of Texas at Austin, a Master of Business Administration in Finance from Texas State University, and a Juris Doctor in Securities from St. Mary's University School of Law. Follow him on Twitter here. Greg Kalb is an Investment Advisor at Texas Capital Bank Private Wealth Advisors. He holds a Bachelor of Arts from The University of Texas at Austin.

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