Market Outlook

New Covid Variant Impact

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new covid variant

U.S. equities tumbled in a shortened Friday session over fears of a new COVID-19 variant. Stock indexes were little changed heading into the U.S. Thanksgiving holiday, but the late-week meltdown sent stocks lower. Last week was a reminder that the economic recovery path is still dependent on progress against the pandemic and how quickly conditions can change. All 3 major indices finished lower on the week.

Last Week – New Covid Variant

The new covid variant strain is thought to be the most mutated variant yet. This is creating concern over the effectiveness of current vaccines and the durability of global economic recovery. Prior to Friday’s decline, the S&P 500 index had gained over 9% for the quarter and over 26% YTD. For the week ending Friday, the Nasdaq was down 3.52%, the S&P 500 down 2.18%, and Dow finished down 1.95%.

The volatility index soared 10 points to 28.50. Oil prices initially rallied after the U.S and five other countries coordinated to release reserves but ended up down 13% on the week. The average price of gasoline in the U.S. is $3.70 per gallon, approximately $1.25 higher than one year ago. However, oil prices did not decrease on the news, as markets viewed the amount too small to make an impact on prices at the pump.

U.S. economic data was largely positive, however, the new covid variant renewed pandemic risks. Jobless claims, which totaled a stunning 199K, was the lowest level since 1969. President Biden announced he would nominate Fed chair Powell to a second term. Consumer prices have yet to ease, as the Y/Y Core PCE Index rose 4.1%, the highest annual level since 1990. Private sector growth remained robust in November, with U.S. manufacturing PMI increasing to 59.1, but services slipped to 57.0. The second estimate of Q3 GDP ticked up to 2.1% from 2.0%, with a massive upward revision to the increase in wages and salaries.

New home sales rose 0.4% in October, and existing home sales climbed 0.8%. Realtors are projecting full-year sales of over 6 million, which would be the highest total since 2006. Finally, global PMIs echoed U.S. conditions, with strong private sector growth being tempered by inflationary pressures and supply bottlenecks.

Week Ahead

Last week was a reminder that the economic recovery path is largely dependent on progress against the pandemic and how quickly conditions can change. Central bank leaders will likely have to continue exercising policy flexibility. Some economists just published expectations of a potential 8% surge in Q4 U.S. GDP, but it remains to be seen how this new covid variant threat may undermine that outlook. After last week’s strong unemployment claims number, investors will look for additional labor market clarity from Wednesday’s ADP and Friday’s NFP reports. This week also brings U.S. ISM manufacturing and services PMIs, along with the regional report from Chicago.

Year-to-date index performance; Dow up 14.03%, S&P up 22.33%, and Nasdaq up 20.20% through the close on Friday.

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Earnings Impact and All-Time Highs

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earnings impact and all-time highs

New highs for the S&P 500, oil, and midcap stocks. U.S. equities posted moderate gains despite disappointing earnings from some technology companies. The S&P500 Index reached a new all-time high, advancing 1.5%+ for the week, while the Nasdaq Composite’s returns were similar. The final week of October kicks off with earnings from Facebook today. Reports from Boeing, General Motors, Caterpillar, Mastercard, and Exxon Mobil are also on the calendar. Indexes all finished higher last week; the Dow up 1.12%, S&P 1.66%, and Nasdaq 1.30%.

Last Week – Earnings Impact and All-Time Highs

U.S. equities posted moderate gains despite disappointing earnings from some technology companies. The S&P 500 Index reached a new all-time high. Stocks ended last week higher after rising four out of five days. The index has returned over 20% this year despite multiple economic and geopolitical headwinds. Inflation from global supply-chain constraints continues to spook investors. As evidenced by the market movement proceeding comments by Federal Reserve Chairman Jerome Powell on Friday. Fed Chairman Powell spoke at a conference and reaffirmed the plan to begin asset purchase tapering this year. He also signaled that supply chain issues and high inflation will likely persist into 2022. Investors are concerned that higher costs from supply-chain disruptions will lead the Fed to raise interest rates faster than expected. This view has been dampened by strong earnings reports from many companies leading major market indexes to near record highs.

U.S. economic data was mixed. The Fed revealed economic activity continued to grow at a modest to moderate rate, with the pace of growth slowing. The Philly Fed Index fell to 23.8 in October, reflecting an expected pullback from the prior month’s spike. October PMIs were driven by services, which rebounded to 58.2 from 54.9. Manufacturing fell to a 7-month low of 59.2 on raw material shortages. Homebuilder confidence rose on high buyer demand, as existing home sales surged 7% in September to an 8-month high. Housing starts fell on input and labor scarcities. Weekly jobless claims hit another pandemic-era low of 290K with continuing claims dropping to 2.48 million. This signals a reluctance to lay off employees while hiring remains challenged.

In corporate news, Intel plunged 11%+ Friday after its PC chip sales fell due to component shortages. Social media stocks fell based on Snap’s report of ad revenue disruptions due to privacy changes on Apple devices. On Friday, Pool Inc, Etsy, and Tesla rallied last week as a sign the resilient consumer is powering a strong economy. The S&P 500 is up over 4% since JPMorgan kicked off earnings season about two weeks ago.

Week Ahead

The week kicks off with earnings from Facebook, whose stock has been reeling from regulatory pressures, and Snap’s advertising results. Reports from Boeing, General Motors, Caterpillar, Mastercard, and Exxon Mobil are also on the calendar. Three central bank meetings highlight the economic agenda. The expectation from the Bank of Canada is to further reduce asset purchases on Wednesday. Markets are pricing in 3 rate hikes for next year. In Europe, the ECB has stagflation concerns. This results from slowing growth accompanied by escalating energy prices. The ECB may take a more cautious tone towards rate increases on Thursday. Not much is expected when the Bank of Japan meets, as the economy is still showing little inflationary pressures.

In the U.S. investors get the first look at Q3 GDP on Thursday. Estimates have steadily decreased the past several months, and Fed models sit much lower than the current 2.6% forecasts. This week also offers the durable goods report on Wednesday. New home sales and inventory data will shape investors views along with 165 companies in the S&P 500 set to report quarterly earnings this week. With the earnings impact and all-time highs, they year-to-date index performance; Dow up 16.6%, S&P up 21.0%, and Nasdaq up 17.1% through the close on Friday.

Click here if you would like to learn more about your options and if we can assist you with your wealth management, investment, and retirement planning.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.

Debt Ceiling and the Market Impact

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debt ceiling

Despite Friday’s disappointing jobs report, U.S. equities managed modest gains after the debt ceiling crisis was temporarily postponed. Global central banks continue to express concerns about higher prices but insist interest rate hikes are still far off, preferring to taper bond purchases first. On Wednesday investors will parse through the minutes from the most recent FOMC meeting for additional clues on policy changes. Last week, the Dow finished up 1.27%, S&P up 0.83%, and Nasdaq 0.1%.

Last Week Debt Ceiling Proposal

The S&P 500 Index returned 0.83% last week, regaining some of the previous week’s 2.19% decline. The index is currently up 1.99% for October, a welcomed trend following September’s -4.65%, its worst performance since March 2020. Equites had a rough start to the week as the index declined 1.29% on Monday with the information technology and communication services sectors leading the way down as inflation and growth fears weighed on investors. Markets rallied back on Tuesday and pushed higher through Thursday. Equities received positive news as a $480 billion increase to the debt ceiling was passed by the US Senate allowing the government to continue to operate as usual for a couple more months without a shutdown or default.

After a poor August payroll number, investors looking for strength in employment numbers were disappointed again. The September non-farm payroll data showed an increase of only 194K jobs. Well below the expectations of 500K. However, U.S. initial jobless claims of 326K were lower than the 348K expected and the previous week’s 362K. The unemployment rate also showed positive data as it declined 0.4% to 4.8%, its lowest level since March 2020. However, the labor force participation rate dropped to 61.6% from 61.7%. Overall, the numbers reflect a remarkably tight labor market, as wages increased by 0.6% Month-over-Month and 4.6% Year-over-Year. The weak jobs report led investors to believe it is less likely the Federal Reserve tapers bond purchases. The tapering process is still expected to begin by the end of this year.

Week Ahead

Central banks across the globe continue to express concerns about higher prices, but insist interest rate hikes are still far off. On Wednesday investors will review the minutes from the most recent FOMC meeting for additional clues on policy changes. This week brings inflation data, highlighted by U.S. CPI on Wednesday and PPI Thursday expected to be flat to slightly lower. Germany reports wholesale prices, Japan brings PPI, and China delivers CPI and PPI throughout the week.

On the labor front, U.S. job openings anticipate to tick up to yet another record high. This week will feature the first major Q3 earnings reports. With the large money center banks releasing numbers on Wednesday and Thursday. Financials have been the second strongest sector the past few weeks, boosted by rising yields. Closing out a busy week, U.S. retail sales will reveal how back-to-school shopping fared and if stores were able to stay stocked in the face of supply chain disruptions. The first look at October consumer sentiment also drops Friday.

Year-to-date index performance; Dow up 13.53%, S&P up 16.92%, and Nasdaq up 13.12% through the close on Friday.

Click here if you would like to learn more about your options and if we can assist you with your wealth management, investment, and retirement planning.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.

Evergrande and the Impact on the Markets

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Evergrande

U.S. equities overcame a rough start the week, due to Evergrande uncertainty, then finished higher. Stocks went on a roller coaster ride, with the VIX soaring then crashing post-Fed, whom provided expected monetary policy guidance. Questions remain how quickly tapering may be completed and how early rate hikes may appear. Last week all indexes finished up; Dow 0.62%, S&P 0.52%, and Nasdaq 0.03%.

Evergrande Impact Last Week

A volatile week for stocks turned positive mid-week. Initially major indexes dropped 2-3% on fears of systemic risk from Evergrande, the Chinese
real estate company. Indexes rallied later as the Fed downplayed rate hikes while furthering taper discussion. On Monday, investors were skittish by the debt crisis at property developer China Evergrande Group. China President Xi Jinping is trying to reduce property-sector leverage to make housing more affordable for the people of China.

Back in the US, Federal Chair Powell took note of the global supply chain disruptions. Powell said Friday, “I’ve never seen these kind of supply-chain issues, never seen an economy that combines drastic labor shortages with lots of unemployed people and a lot of slack in the labor market.” His comments come after Wednesday’s post meeting statement outlining the Fed’s reduction of monthly asset purchases as soon as its next meeting in November. The other notable projection was half of the 18 officials expect to raise interest rates by the end of 2022. This contrasts with the June meeting where most Fed officials expected rate increases in 2023.

In other news, U.S. housing data was mostly positive, with housing starts and new home sales rising in August, while existing home sales slipped 2% as surging prices hampered first-time buyers.

Week Ahead

Durable Goods Orders released today and showed positive signs. Inventory data follows later in the week. Inflation may be on the backburner right now, but it is not forgotten. With prices potentially staying elevated and the labor market moving back towards full employment, questions remain on how quickly tapering may be completed and how early rate hikes may appear. Futures markets have priced in the first rate increase for December 2022. Year-to-date index performance; Dow up 13.69%, S&P up 18.62%, and Nasdaq up 16.75% through the close on Friday.

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This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.

Inflation Expectations Rising

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inflation

U.S. equities fell into the weekend despite strong manufacturing data, as inflation expectations weighed. Stocks dropped for a second straight week. Last week all indexes finished down. The Dow down 0.05%, S&P 0.55%, and Nasdaq 0.46%.

Last Week

The S&P 500 and Nasdaq finished down less than 1%. Volatility rose with the VIX closing at a 1-month high. U.S. manufacturing numbers surged, and optimism for the next 6 months remained high. The Empire State index leapt 16 points to 34.3 in September. The Philly Fed index rose 11 points to 30.7, above estimates. Industrial production increased 0.4% in August after a revised 0.8% gain the prior month. The miss was largely due to Hurricane Ida and supply chain inefficiencies. Capacity utilization climbed to 76.4%, the highest rate since December 2019. U.S. retail sales surprised with a 0.7% gain in August despite supply chain issues and escalating Covid-19 cases.

Consumer inflation still showed a significant bump but came in less than feared. A New York Fed household survey showed inflation expectations continued to ramp up in August. Internationally, August wholesale prices sustained gains in Germany and Japan on solid global demand. CPIs in Canada and the UK surged to multi-decade highs. Weak Chinese data also contributed to the market’s choppiness. Retail sales only grew 2.5% in August versus forecasts of 7%. Industrial production came in slightly below predictions at 5.3%. British retail sales fell for a fourth straight month in August, even as payrolls increased by a record 241,000. Australia’s employment dropped more than expected, supporting the Reserve Bank’s decision to delay a review of weekly bond purchases.

Week Ahead – Inflation Expectations

All eyes will be on the FOMC as they wrap up their two-day meeting on Wednesday. Pressure is mounting for more specifics on tapering given recent U.S. economic data. According to a Bloomberg survey of economists, tapering is expected to begin in November 2021. Chairman Powell has indicated the decision to taper is independent of any decision to raise interest rates. With unemployment still above 2019 levels, the Federal Reserve is expected to be patient with increasing rates.

U.S. housing reports will also drop this week. The NAHB Index reported positive numbers. Housing start data reports on Tuesday, existing home sales on Wednesday, and new home sales on Friday. The S&P 500 is only down about 2% this month. More volatility may be on the horizon if issues like the debt ceiling gain momentum. Treasury Secretary Yellen has urged Congress to increase the debt limit as soon as possible to avoid any economic turmoil. The debate could influence the Fed’s actions as well.

Investors will focus on next week’s Fed meeting and the timing of tapering. Tapering is often viewed as a potential negative catalyst in the near term. However, strong economic growth coupled with record corporate profits can potentially keep the market moving higher. Investors will also be watching to see if Evergrande, the Chinese real estate company with a mountain of debt, poses any systemic risks to global markets. Year-to-date index performance; Dow up 13.00%, S&P up 18.02%, and Nasdaq up 16.73% through the close on Friday.

Click here if you would like to learn more about your options and if we can assist you with your wealth management, investment, and retirement planning.

This website is for informational purposes only and is not intended to be specific advice or recommendations. For specific advice or recommendations you would need to meet directly with one of our advisers.