November 2021 Outlook — Pause in the Party?
Taken by Regina Valetova
TLDR
· October was a banner month for equities
· Lots of interest in single-stocks and cryptocurrencies
· My forecast for US core fixed income and US equities are converging
With how many headlines cryptocurrency and certain individual companies made in October, the fact that US equities had a banner month just might be an afterthought to some. The negativity in September lingered briefly in October before the S&P 500 completely erased losses from September and set new all-time highs. That major index was up roughly 7% in October, its growth counterpart was up around 9%, and the S&P 500 Value index finished about 4.5% higher. US real estate also had a banner month, finishing close to 9% higher over the month. I know many of my friends are still itching to buy a house or even bought houses last month, and perhaps fears around the delta variant of the COVID-19 virus stalling returns to offices abated as well. Although the performance abroad wasn’t as strong, international developed equities edged up about 3% while emerging market equities rose about 1%. The fallout of the Evergrande situation and the CCP’s actions towards technology companies in China are likely curbing risk appetite in at least that part of the emerging market sector. Global real estate rose about 2%, and US core fixed income fell about 16 basis points.
I am no expert in sentiment analysis, nor am I an influencer. I do, however, utilize social media for both research and entertainment. While there has been a lot of chatter about the power of single-stock and single-asset investing, I feel as though it has reached a fever pitch over the last couple months. Given that social media algorithms often guide members towards the type of content members have engaged with before, I may just be seeing a disproportionate amount of these discussions. No two investors have the exact same goals or risk tolerances, so I won’t say that diversification is unequivocally better than concentration. What I will say is that concentration leads to greater potential return but exposes the investor to significant company or asset-specific risk. A famous quote attributed to Warren Buffet goes, “Be fearful when others are greedy and greedy when others are fearful.” With so many “experts” touting the merits of concentration and why their asset is the best asset to own, I find myself feeling a hint of fear.
Setting that behavioral analysis aside and moving to my quantitative forecasts, I am less bullish on equities globally. Although I still favor the US over international regions and continue to favor growth over value, my expected returns are consistently lower across regions and style tilts. Focusing firstly on the US, the reduced expected return is partially due to multiple expansion. Economic theory suggests that multiples can’t expand forever and possess some mean-reverting tendencies. For now, my opinion is that the multiple is more likely to contract or stay level than it is to expand, so other sources will need to contribute for returns to stay positive. For growth and value, there were three key developments I noticed: commodity prices rose substantially, medium-term and longer-term yields fell, and growth strongly outperformed. Rising commodity prices tend to be better for the performance of value stocks, but falling yields tend to be better for growth. Ultimately, the increase in commodity prices and strong outperformance of growth have brought the forecasts for growth and value closer together, but I still favor growth.
For US real estate, although my overall return forecast has come down, the spread by which I expect it to outperform US equities has stayed relatively flat. Some of the primary factors that I use to forecast real estate performance continue to remain favorable for home-buying (controlled yields and easy access to loans). The forecast for global real estate edged up slightly, but the asset class is the one I’m the most bearish towards. With respect to the factors I monitor, not much has changed in the last month.
Finally, the most interesting (in my opinion) update I have is that I have US core fixed income performing in-line or slightly better than the S&P 500 index over the next six months. There is standard error in any forecast, so while I may not get the exact returns correct, the fact that these forecasts are converging stands out to me. Valuations have stretched beyond what many think is rational, and as seen in recent earnings reports, numerous corporations have reduced revenue and earnings forecasts. There’s no guarantee that the companies will report better or worse numbers in the future, and I’m certainly not calling a top in the market. With the increased interest in meme stocks and meme coins (cryptocurrency tokens that were initially created as jokes but are now supposedly being transformed into stores of value), there are certainly elements of recklessness in the markets. That being said, the economy is still strong, and numerous surveys and news outlets are reporting that US workers are commanding more power than they have historically. Putting this all together, I don’t think a deep correction is imminent, but I also wouldn’t be surprised to see elevated volatility and a steady rotation into less risky assets over the next six months.
