Markets might have slowed in recent weeks, but it’s still been a year of outperformance with the S&P 500 logging 66 record highs thus far, the second greatest year for market performance on record.
Current conditions have seen gains and losses in many areas, but real rates on interest rates are currently at record lows at the same time the dollar has hit a 16-month high, wrote Mark Hackett, chief of investment research for Nationwide’s investment management group, in a recent blog post for Nationwide.
The Bank of America Global Fund Manager Survey for November found that 65% of those surveyed were anticipating economic growth over the course of the next year. Historic inflation remains a concern and a factor in current market conditions, but 61% of the fund managers in the survey believe the inflation to be transitory, aligning with the Federal Reserve’s sentiment.
While risk tolerance is down from the 25% highs in February, it has still increased 10 points recently, with 5% of fund managers reporting that they were partaking in above-average risk. Equity allocation has increased to a net 29% overweight, increasing 13 points for the month, and cash levels are down to 4.4%.
“Volatility could be the theme this week due to the holiday, with economic data largely consolidated into Tuesday and Wednesday, and trading volume historically light,” Hackett wrote. “Given strong fund flows, buying pressure from share repurchases and window dressing for institutional investors, it is difficult to see what could derail the market momentum into year-end.”
Heading into the holiday season, manufacturers are reporting that the chip shortage is easing, and big box retailers are optimistic about their inventory levels and sales potential. Add onto that a reduction in the prices of skyrocketing shipping prices, and it could equate to a strong finish for the year.
There is some signaling that the supply chain issues might be abating slightly; the Port of Los Angeles reported a 30% reduction in the number of shipping containers that were trapped waiting last month. The industry could continue to face labor shortage issues going forward into the new year and beyond, however, and that could extend supply chain instability.
COVID-19 continues to be a looming threat, with cases on the rise once more in 39 states, but vaccines are helping to mediate the worst of the effects from another spike in cases. Over in Europe, despite high rates of vaccination, there have been pronounced spikes in COVID cases, and some countries are once again entering lockdown to combat the spread.
Futures markets are currently reflecting over a 50% chance of interest rates rising three or more times next year, with the Chicago Fed President as well as the Atlanta Fed President both making remarks recently about raising interest rates beginning the middle of next year due to the unexpected persistence in inflation. Better indicators of Fed direction should come from the December 15 meeting of the Federal Open Market Committee (FOMC).
“This week could be interesting for markets, given a light slate of data and low expected volume given the Thanksgiving holiday,” Hackett wrote.
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