Forget Black Friday it's Red Friday - Your Money November 26th 2021

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It was a short week for American’s courtesy of their Thanksgiving on Thursday and Black Friday today. The NYSE closed at 10am our time in a blood bath of stock selling. It is interesting to note that crude oil dropped $10 today back to $68 a barrel. If I were a conspiracy theorist, I would say that is curious how prices plunged back to $68 just days after Saudi Arabia and OPEC refused to increase production despite pleas from President Biden to do so. At $80 per barrel both the Federal Reserve led by Jay Powell and the Democrats in Congress are feeling the inflation heat of higher gas and heating prices as we head into winter’s peak demand.

Pundits are blaming today’s sell off on the “surprise” announcement of a new strain of covid from South Africa that may be immune to the current vaccines. Really? Covid strains are mutating all over the world and suddenly this one might be immune? I am no scientist and granted the new strain has a unique protein spike, but it took the experts at Pfizer, AstraZeneca, Moderna and Novavax less than a year to create a brand new vaccine to beat this virus. Let’s face it, Covid is here to stay and while mask use may wither away as communities reach herd immunity, we will likely need booster shots annually to keep our immune systems protected from prolonged illnesses or worse. I Cannot stress strongly enough to get vaccinated. You are not just protecting yourself but also those around you especially those with compromised immune systems, the very young and the very old. Ignore the conspiracy theorists that vaccines are bad for you. The evidence says otherwise.

Meanwhile back to markets. I don’t put much stock in today’s sell off. Let’s face it, you could fire a cannon off in every office on Wall Street and not likely hit someone. For those not sleeping off a turkey hangover, the rest were hard at their computers on Amazon or in lines at malls to get Black Friday bargains. Volumes in New York on Wednesday and today were around 850 million, 10% percent below the monthly average. So it wouldn’t take a rocket scientist to figure out today would be the best day to create a mini panic in the futures market and trigger a sell off in the cash markets. Stock markets today move within trading bands set by computer algorithms and seeing as how it was moving close to the lower boundary over the last week, a couple of trades here and a couple of trades there and oops the Dow plunges 1000 points. And don’t forget the law of large numbers now creates the illusion of a meltdown when in point of fact, in percentage terms, its only about 2.5%.

Having said that, the Fall melt up, has put many stocks well above their historical long term valuation metrics. I can never figure out if Apple is the biggest company in the world or is it Microsoft, as they seem to trade places every other month. But in the case of Microsoft, the stock is trading at 35 times forward earnings and its five-year average PE is 27 times. The S&P is trading at 22 times earnings, so maybe there is a little air in the price of the mega caps. In my opinion it would not take too much bad news to send markets lower in December. Longer term, it will be inflationary pressure that will drive the stock market bus. With crude oil back under $70 versus $85 just a couple of weeks ago means the Fed has room to maneuver before being forced to tighten monetary conditions. Earlier this week 10-year bond yields were threatening to break back above 1.75%, today they broke down to 1.48%. that is a big one day win for bond traders, clearly Christmas came early. Of course, that is well below the rate of inflation so not a fan at these levels, especially when you can earn more than 3% in many stocks.

Bottom line. Don’t panic. We get hiccups like this all the time. In fact, technically the market was overdue for a pull back. If you want to look at hedges, we have a couple of good ones, but the economic stats this week were pointing to an improving economy and unless next week’s jobs numbers are dismal or proof that pharma companies will have to go back to the drawing board, this too shall pass.

Happy trading and stay safe.

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Steve Bokor

Steve Bokor

Portfolio Manager