After a complicated month of September in which volatility took over the markets, October has presented itself with renewed energy and a dose of optimism on the part of investors, having been the best month so far this year:
S&P +6.9%; Dow Jones +5.8%; Nasdaq +7.3%; Russell2000 +4.2%;
STOXX 50 +5.0%; Ibex +3.0%
USA
The Q3 results publication season has begun. Having presented their figures for ~60% of the S&P members, we are seeing how the income and profits of most of them (~75%) are beating forecasts. This earnings season is of special interest as it allows us to evaluate and have greater visibility of the impact on margins due to increased costs (inflation) derived from problems in supply chains and labor shortages.
In this context, the stock-picking It becomes even more relevant, if possible, because investors are no longer “buying everything” as has happened before, but are being more selective and therefore, each action is adjusting to “their reality.” This is why those that will perform best will be those with the pricing power to transfer their higher costs derived from inflation to the sales price of their products or services. It is therefore key to analyze the growth of margins and profits.
It is striking that the figures of numerous companies, even though they beat the forecasts, have not been well received in the market since they have not met the expected growth expectations. It is clear, especially in an inflation environment, that what investors are looking for is to place their money in companies in which not only their income and operating profits are maintained, but also continue to grow.
Some comments on the results published to date:
- Large banks such as Bank of America or Goldman Sachs have published very good figures, driven by strong economic activity and expectations of rising interest rates.
- Technology companies, such as Google, Tesla, Netflix or Advanced Micro Devices, have beaten forecasts and have maintained very positive outlooks thanks to the strength of their business and the lack of excessive dependence on other manufacturers.
- Some companies such as Apple, Amazon or Intel have published figures below expectations due to, among other reasons, problems in supply chains and labor, announcing that it will continue to affect them for the remainder of the year (especially at Christmas). .
According to the latest data, inflation core (excludes food and energy) increased by 0.2%, below expectations, to which the Fixed Income market reacted with a significant drop in performance (yield) of the American bond. Most of the current inflation is linked to the food and energy sectors (natural gas and oil), which maintain a direct relationship since the energy crisis is raising the costs of fertilizers, which are passed on to the price of food. Taking into account that other important sectors such as the automotive or textile sectors show signs that they may be stabilizing, if the two components can be controlled non-core, something that will take time, inflation as a whole can be relaxed.
Although the inflation data that will be published in the coming months will continue to be high due to insatiable demand (even more so, considering seasonality) and supply problems, they will have to be put into perspective since these inflationary pressures will decrease during 2022.
On the other hand, very positive data on economic activity such as retail sales and consumer confidence have been published, which reflect the sustained economic recovery.
There is a very positive factor that will boost the stock markets in the remainder of 2021. Since September, we were in blackout of repurchase of own shares, a period during which, by law, companies cannot carry out repurchases due to the proximity of the publication of their results. Throughout the month of November and as they publish their results, companies will be able to resume their buyback plans. This factor has been decisive and very bullish for the markets in recent years. According to Goldman Sachs, starting in November, $3,800m will enter into buybacks per day, a non-negligible figure.
We will also have to keep an eye on the approval of Biden's infrastructure plan and the resulting tax increase for its financing, whose new approval deadline is December 3, the day on which they will also have to reach an agreement to increase the debt ceiling that was approved temporarily.
China
The slowdown in the Chinese economy remains on investors' radar, although concerns about Evergrande and the country's potential real estate crisis appear to be easing. GDP growth in Q3 was worse than expected, at 4.9%, affected by the real estate market and industrial production. Despite the slowdown in recent months, it should be noted that there is still considerable growth, and even more so, taking into account that it is being negatively affected by temporary events, so the country will grow again at a higher rate. . The unemployment rate surprised positively, falling from 5.1% to 4.9%.
Eurozone
The Eurozone grew by 2.2% in Q3, more than expected thanks to the easing of COVID restrictions. Also affected by the same problems as the rest of the world: supply shortages and rising inflation. The ECB seems unlikely to raise rates before 2023, which will still be very positive for companies.
Technical analysis (Indices)
The major correction that sparked panic in October has undoubtedly been very healthy for the market. The American indices corrected to important supports such as their moving average of 100 (without reaching 200, where there would have been more drama) and respected them, a level from which an important rebound began that has taken us to historical highs. This movement has allowed the market to be “cleaned” of weak hands, making the stop loss and excessive leverage. Likewise, we must highlight the high volume that has accompanied the rise, which gives it greater credibility and strength.
Conclusions
In short, the financial markets once again show us their natural ability to change their moods in a very short time. We have gone from a month of September in which some only spoke of a crash imminent at the beginning of November in which, as I anticipated in the previous report, most of the American indices are already at maximums and waiting for a new rally Christmas.
There are many opportunities to invest in and we are at a historic moment for the Equity market. Let's not let the pessimism of the media and the so-called "experts" make us change our investment strategy and philosophy and make sure we maintain it to achieve our long-term goals.
Dan Benbunan
Portfolio Manager
