By: Stash Graham
The month of November ended with a bang as the newly renominated Federal Reserve Chairman Jerome Powell testified to the Senate Banking Committee that he believed the term transitory should be “retired” when used to describe inflation. The development of a Federal Reserve that is now no longer dovish but hawkish means that there will be a change in liquidity and sentiment in financial markets. Predictability markets moved lower of the news. The technology-heavy NASDAQ moved from up +1.5% to down -1.5% in a matter of minutes. Overall, all major domestic indices lost their positive momentum from September and October for the month. The Dow Jones Industrial Average was down -4.0% for the month, while the S&P 500 finished down -1.05%. The NASDAQ Composite Index was also lower by -0.35%. Still, we will keep a close eye on this index as a period of tightening monetary policy tends to punish more expensive stocks currently found in mass within the technology sectors. Notably, the Russell 2000, which tracks smaller capitalized companies (median market cap of ~1.2 billion), fell almost -7% on the month and is at the doorstep of correction territory as I write this (evening of November 30th). The price of gold continued its underwhelming year by losing just over -1% for the month. Our broad basket commodity tracker position (Ticker: PDBC) was also weak on the month, falling almost -9%. Fortunately for us, we have paired back our position greatly before the significant selling pressure in the last week of the month.
Recent weaknesses in the market have created a renewed sense of concern as the breadth of the publicly traded companies doing well and poorly is fragile. According to our data, new 1-year lows increased to 8.38% among S&P 500 members, with the index down 2.92% from its high. When new lows expand, and the market is near a high, something is amiss with market participation, suggesting rising risks. Monitoring financial asset prices during these periods is even more critical when you consider the Federal Reserve Chair has now publicly stated that financial support is coming out and coming out at a quicker pace. The bigger question is why the Federal Reserve Chairman just recognized inflation as having staying power? He was renominated just a week ago. How did conversations with President Biden go? Did the President tell him that inflation is hurting the average Joe and the Fed’s monetary policy is why? Considering the rapid reversal of his long-held policy, it seems like it.
According to the most recent Federal Reserve Bank of Dallas Manufacturing Survey, supply chain issues are starting to ease but remain historically high. 50% of retail executives polled by the Dallas Fed expected supply chains to return to normal in 4-9 months (up from 33% in September). Since hitting a record high of 31.2 in March 2021, delivery times have drifted down towards the low 20 range. A few days ago, Walmart CEO Doug McMillion declared his company “had noticed a 51% improvement in flow through Southern California ports”. As such, it looks like the supply pressures in the inflation equation are just starting to lighten up. Consumer confidence surveys and retail sales reports are continuing to flash warning lights. In the Conference Board’s November Household Survey, we witnessed record low buying plans for new and used homes and autos. Separately, we have now realized four straight months of contraction in future backlog (unfilled orders). Finally, the National Retail Federation (“NRF”) survey said that U.S. shoppers spent -3.5% less than last year on consumer goods between Thanksgiving and Cyber Monday. Compared to the same period in 2019 (pre-COVID world), the U.S. consumer spent about -20% less. Considering this growing backdrop of consumer uncertainty leading into concerning retail sales figures, a suddenly more hawkish Federal Reserve could prematurely tighten financial conditions too much.
As we enter the Winter holidays, Capitol Hill will likely avoid a government shutdown the first time around. They will agree to a Continuing Resolution to cover the government for a month or two. Still, it seems Senate Minority Leader Mitch McConnell has no interest in agreeing to terms to cover the government spending for 2022 and beyond.
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