Inflation remains front and center in the minds of market participants and consumers. Fed by supply shortages, labor costs, worker shortages, and strong demand for goods and services, the October CPI (Consumer Price Index – the most widely used proxy for overall price increases) rose 6.2% over the past year, the largest 12-month increase in the past three decades, according to the Bureau of Labor Statistics.
Consumer Price Index
The headline unemployment rate continues to head in the right direction. Nationally, the overall rate dropped to 4.6% in October and 4.2% in November, both down significantly from the peak back in mid-2020 during the initial Covid lockdowns. Closer to home, Nebraska’s unemployment rate stands at 1.9%, the lowest level ever achieved by an individual state.
Unemployment Rate
The Stock Market
Stocks started the month on a strong note, posting seven new closing highs between November 1st and the 25th. However, as news of another Covid-19 variant emerged, stocks ended the month of November on a volatile note. The market sold-off on Black Friday with the S&P 500 down 2.27%. Traders decided to “buy the dip” and the market rose 1.32% on the 29th. However, as Fed Chairman Jerome Powell admitted in testimony to congress that inflation may not be as “transitory” as was initially hoped, markets sold off once again, down 1.9% on the last day of the month. All-in-all, the S&P closed out the month of November with a slight decline. For the first 11 months of 2021, the S&P 500 index has posted 66 new closing highs (second only to the record of 77 in 1995, according to S&P Global) and has returned 23.17%.
Other major market indices were all in negative territory for the month, except for the NASDAQ index, which was up slightly. Small-cap and International stocks were all down by 4% or more for the month. For the most part, stocks have produced positive returns for 2021, apart from emerging markets, which are now down 4.21%.
Fixed Income
Longer-term bond yields traded down in the last week of November with the 10-year treasury yield dropping nearly 0.20% in the last week of the month. This likely reflects uncertainty surrounding the trajectory of the Omicron variant and the impact on the economy and risk-oriented assets. At the same time, shorter-term bond yields have been trending up with the 2-year treasury yield rising from under 0.25% to over 0.5% since the end of September as the Federal Reserve has communicated their intent to taper asset purchases and begin to lift interest rates from zero.
Conclusion
COVID-19 continues to impact markets and the economy now, even after 21 months since the initial wave. While feelings of fear, anxiety and uncertainty were normal and to be expected in March of 2020, the general feelings now seem to have evolved to annoyance and fatigue with a constantly evolving narrative around a pandemic that increasingly resembles an endemic. As long-term investors we understand that markets are networks for price discovery. When everything is well understood and agreed upon the price discovery mechanism will function in a smooth and organized manner. When there is greater uncertainty the process will become more disjointed. However, it is often during these episodes that the market takes the opportunity to reset and build the base for future opportunities.
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