The S&P 500 finished October +7 %, while the Nasdaq Composite finished similarly +7 % and the Dow surged 6%% which was a nice rebound from the -4 % slide in September. We saw a new king of the S&P 500, Microsoft which reported stellar earnings and finished the month worth about $2.49 trillion.
According to data published by FactSet, the S&P 500 ended the third quarter at 20.1X forward earnings estimates compared to a five-year average of 18.3X. Although we expect to see further earnings strength well into 2022, we see limitations for multiple expansion in the months ahead. It is also relevant to point out that P/E multiples are highly bifurcated, with the most prominent growth stocks trading at historically high multiples relative to their long-term growth rates and industrial and cyclical stocks trading at low multiples consistent with the latter stages of an economic cycle. Headwinds for P/E multiples include the prospects for a higher U.S. corporate tax rate, an increase in the capital gains tax, and the possible increase in long-term interest rates brought about by a pickup in inflation. While many industrial and economically sensitive stocks trade as if we are in the late stages of an economic cycle, we do not see the typical signs that would suggest that the economic cycle is nearing maturity. Such signs would include a build-up in inventories of consumer goods or excess capacity in manufacturing. We are paying close attention to the impact that supply chain dislocations, a tight labor market, and rising material costs could have on profit margins. For many businesses, inflation and logistical challenges will adversely impact profit margins and revenues in the months ahead. Current indicators are mixed; the bond market has rallied driving rates down; lumber has softened which indicates a softening in the housing market. Neither are good signs for the stock market. With mixed signals and lots to watch for, we are nervously optimistic.
Fun Facts for November: I thought about focusing on things such as an Indian Summer, which can only happen in November, then decided to simply focus on Thanksgiving which is a celebration of a bountiful harvest. Turns out this thought was not new to the Pilgrims, there are mentions of similar celebrations throughout history with records from the Egyptians, Greeks, and Romans.
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