Developments over the Past Month


  • Monthly Recap: November tends to be a seasonally strong month but turned out to be much more volatile than expected, especially during the holiday-shortened week. First, the market had to digest the introduction of the Omicron variant, and then on the last day of the month, had to process a slight change in tone from Jerome Powell during his Senate Committee hearing. Off this news, the market was slightly down during the month, led by the recent “safe” havens, i.e., Technology. Small caps, on the last day of the month, briefly entered into “correction” territory – down more than 10% from peak-to-trough. No surprise, given the emergence of a variant-of-concern, International underperformed.
  • Where Do We Stand? The path of least resistance has been higher in recent weeks, but there are a lot of moving pieces for the market to deal with – just look at the recent volatility. 1) Introduction of the Omicron variant 2) A potentially more hawkish Fed – Jerome Powell said that he would “consider” speeding up the pace of tapering and that it’s time to “retire” the word “transitory” when referring to inflation. Not to forget, the potential for increased political volatility – Congress will be debating the Build Back Better, debt ceiling, government shutdown, and National Defense Authorization Act all in the same month.
  • Where to from Here? Since 1950, we count 22 examples of a negative November performance for the S&P 500 (November 2021 now marks the 23rd observation). Surprisingly, the historical likelihood of a positive December has been higher following these down November observations – of the 22 negative Novembers, the month of December then saw a positive S&P return 19 times (86% hit rate vs. a historical average of 75%) with average performance of 2.7% (vs. a historical average of 1.5%).
  • Equity Fundamentals: As equity valuations come under scrutiny amid the rapid rise in real rates, investor focus will increasingly assess whether earnings growth can continue to lead the market higher. As earning’s season has now winded down, consensus estimates expect S&P 500 EPS growth to increase +27% year/year into the end of the year. We believe there is upside to consensus estimates but expect the frequency and magnitude of EPS beats will moderate from 1H 2022. There remain a few key risks to watch: (1) Supply chains, (2) oil, (3) labor costs, (4) Fed tapering cadence, (5) Omicron variant, and (6) China growth.
  • The Fed Announced a Tapering Plan: As expected, the Federal Reserve officially announced the beginning of a tapering process to start in November. This was somewhat expected by the market, as Fed Chair Powell clearly articulated his plan over the past few months. Furthermore, the Fed announced the cadence of the tapering through year-end, $15B/month, which will be assessed again in January 2022. Ultimately, tapering would be complete by the end of Summer 2022. Lastly, Fed Chair Powell has begun to initiate more hawkish commentary on the cadence of tapering in 2022 but has remained very dovish when it comes to interest rate hikes. The market is currently pricing in two rate hikes next year and four in 2023.
  • C. Risks Likely to Take Center Stage Over the Next Few Weeks: DC will start garnering more attention in the coming weeks as the political calculus around passing a reconciliation bill and the debt ceiling debate will likely guarantee some market moving headlines.
    • Debt Ceiling: The can was kicked down the road for the debt ceiling. In late September, the House and Senate were able to pass a short-term budget resolution to keep the government funded until December 3rd.
    • Infrastructure Bill / Reconciliation Package: Speaker Pelosi delinked the reconciliation bill and the bipartisan infrastructure bill, saying that negotiations on the reconciliation bill were not far enough along to continue to pair passage of the bills because the size of the reconciliation package had to come down. Nonetheless, in November, Congress officially passed an infrastructure bill.
    • Taxes: We believe taxes will continue to be a large part of the reconciliation package, as new ideology for corporate taxation have begun to unfold, i.e., minimum corp. tax – not an increase in the statutory tax. Furthermore, the potential addition of  buyback surtax has been floated around. As one would expect, this continues to be an evolving matter. Given the fact that Congress has less than a week left to meet, we believe that the tax issue will become a 2022 problem.
  • 2021 S&P 500 operating earnings = $205. 2022 = $222. 2019 = $165. Bottoms-up for 2020 = $142 (was as low as $125 in June 2020).
  • S&P 500 Fwd. P/E is at 21.5x. EAFE is 14.7x forward P/E, while EM is at 11.9x. R1V is 15.7x v. R1G at 31.3x.


Talking Points –December 2021


  • President Biden outlined the biggest expansion of the federal government matched with the largest tax increase since 1968. Biden senses the post-COVID era is a once-in-a-generation opportunity to massively restructure US fiscal, monetary, and social policy. In our opinion, this is a big experiment. We’ll wait to see how the Build Back Better plan and taxes pan out. It appears that this dramatic change in societal direction has proved to be difficult for some moderate Democrats to get on board.
  • We have expected bond yields to reflate as the pandemic improves and economic activity begins to normalize. The spread on the 2s and 10s has historically expanded as wide as 300 bps (~92bps as of November month-end). This year’s peak was in March at ~160bps.
  • With the recent Merck /Pfizer Therapeutic news, we believe that this should create an environment of increased optimism surrounding the resumption of normal economic activity, our expectation is that rates will continue to rise, and market leadership will shift away from Tech Growth into more downtrodden components of the market.
  • The first half of the year was led by a bunch of one-hit wonders, i.e., most likely not repeatable – a very dovish Fed, a successful economic reopening, and $8T of stimulus. None of which are expected in the second half of the year. The market may have to navigate a slew of negative headlines – increased taxes, higher-than-expected inflation, continued supply bottlenecks, and the possibility of more variants. All in all, we believe that this can create an environment of increased volatility.
  • We feel it will be worth watching the general trend of economic and fundamental data, and when it will begin to decelerate.
  • Longer-term, we believe valuations and bond yields will eventually matter, and both will lower expected returns for balanced portfolios.



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