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T2 Asset Management

Nov 2021 Market Commentary

The end of the beginning or the beginning of the end? We have spent years in our commentary describing the endless flow of money into the stock market from the Federal Reserve starting in 2008. In fact, the Federal Reserve was created to reduce bank panics and be a lender of last resort. This is proper that they should do this to avoid runs on banks like we saw in the great depression. However, they have now been pumping money in for 13 years straight from the financial crisis. They also really turned it on during covid to the point that they are now pumping in $120 Billion dollars a month. The result?

So, what could stop this? One word, inflation. Eventually all this money being pumped in would be inflationary and we are now getting our first look at it. Now there are some that say this is a “transitory” inflation and that things will soon return to normal. That may be true, but this is the first time we have really seen this in the last 40 years. Even those in the transitory inflation camp can’t help but notice the prices of food and gas and wages at this point. So far this has been enough for the Federal Reserve to slow its monthly rate down to $105 Billion a month. However, if inflation does worsen, the Fed will be forced to get more aggressive, and the stock market certainly won’t like that.

 

On the economic front for the month Gross Domestic Product came in at 2% missing expectations of 2.7%. Retail sales were up 0.7%, higher than expected. Finally non-farm payrolls were up 531,000, beating expectations of 450,000. Overall, the economy seems to be staying strong despite many headwinds.

 

So for now, more of the same. The U.S. stock market has a price earnings ratio of 29, twice its long- term average of 15. However, if the government keeps pouring in the money, this is unlikely to change. The market can stay very overvalued for quite a long time if the financial support stays in place. If higher inflation forces the Fed to tighten policy and stop printing, things could get very ugly. For the time being, we advocate staying cautiously invested while this shakes out.