Market Review

Supply Chain and Earnings Kick-Off

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supply chain

U.S. equities posted solid gains, the labor market improved offsetting inflation pressures. Investors will be wary of seasonal weakness even as the S&P 500 is showing signs of reversing its recent downtrend. This week’s Q3 earnings reports will feature prominent names like Netflix, Tesla, Intel, AT&T and American Express. Last week all indexes finished up. The Dow up 1.58%, S&P 1.84%, and Nasdaq 2.18%.

Last Week – Supply Chain

The S&P 500 Index returned 1.84% last week, the best week since mid-July and seventh best week for the year. Equities shook off negative supply chain headlines and rallied on the strength of earnings. Labor market improvements also supported the positive week, offsetting ongoing inflation pressures. The U.S. supply chain has been bottlenecked as a result of the COVID pandemic. Inventory is drying up as clogging remains an issue at U.S. ports. Inconsistent passenger airline activity is holding down freight via airlines. U.S. inflation rose higher in September by pandemic-driven shortages. CPI advanced 5.4% from the year earlier and the PPI advanced 8.6% from the year earlier. In meeting notes, the Fed commented that it observed PCE (personal consumption expenditures index) prices well above their targeted 2% rate but that they continue to anticipate this to be transitory.

Despite supply issues, equities rallied as earnings season kicked off with some strong announcements last week. Some of the more notable announcements were from mega cap banks. Strong bank earnings announcements further confirm that the U.S. economy is on solid footing despite some supply chain and employment headwinds.

The Minutes from the September 21-22 Federal Open Market Committee meeting released. The Fed indicated that tapering could begin as soon as mid-November and fully anticipates it will begin before 2022. They expect supply pressures to partially ease as supply chain issues resolve and import prices fall. High resource utilization rates in 2022 are also expected to assist in lowering pricing pressures and in total the Fed anticipates the PCE will fall below 2% in 2022 and “edge” higher to reach 2% in 2024. Retail sales rose 0.7% in September led by general merchandise stores, gas stations and autos.

New unemployment claims fell below 300K for the first time since the pandemic began, a milestone for the job market. Jobs openings also fell for the first time in 6 months but quits pushed to a record high of 4.3 million in August. The “Great Resignation” is real.

Week Ahead

Looking ahead this week, earnings season continues with 76 names in the S&P 500 expected to report quarterly results. Some notable names
include: Tesla Inc., Netflix Inc., Honeywell International Inc., Union Pacific Corp. and American Express Co. The U.S. economic calendar is light, with industrial production numbers today followed by housing data on Tuesday and Thursday. The Fed’s Beige Book and Philly Manufacturing Index will provide additional insights regarding regional economic conditions. Finally, an eye will be on the Evergrande Group situation after China’s central bank sought to ease concerns about spreading economic risks.

Year-to-date index performance; Dow up 15.3%, S&P up 19.0%, and Nasdaq up 15.6% through the close on Friday.

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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.

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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.

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.

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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.

Impact of a Slowing September

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slowing

Stocks pulled back, but the S&P 500 and Nasdaq still sit firmly above their respective 50-day moving averages. U.S. equities eased off record highs as slowing growth prospects and persistent inflation led to some profit taking. With all the global central bank commentary last week, anticipation is building for the Fed’s next meeting on September 21-22. In the meantime, this week presents plenty of additional data for consideration. Last week, all indexes finished lower. The Dow finished down 2.1%, S&P down 1.7%, and Nasdaq down 1.6%.

Last Week – Slowing Data

U.S. equities eased off record highs as slowing growth prospects and persistent inflation led to some profit taking. The S&P 500 and Nasdaq both slipped 1.5%+. Market breadth was quite weak, as all 11 S&P 500 sectors finished in the red, with consumer discretionary the outperformer. The S&P 500 Index returned -1.68% last week, with all four days in the shortened holiday week posting declines. Including the previous Friday, the index has marked five consecutive losing days after hitting an all-time closing high. Equity markets have followed an upward trend most of the year.

Goldman Sachs downgraded its 2021 U.S. growth estimate to a 5.7% annual rate, below the 6.2% consensus. The Fed’s Beige Book noted that growth had “downshifted slightly to a moderate pace”, slowing led by escalating inflation and a shortage of goods. On the labor front, U.S. job openings hit record highs for the fifth straight month, climbing to 10.9 million in July and exceeding total unemployed by 2.5 million. Workers continued to quit jobs at historically high rates, and new unemployment claims fell to another pandemic low of 310,000. The four-week moving average of 339,500 was also a pandemic low, indicating there has not been a rise in layoffs due to the Delta variant.

Producer prices in the U.S. surged 0.7% in August, above estimates but below July’s 1% pace. Excluding food and energy, core PPI only increased 0.3% Month-over-Month, but still 6.3% higher Year-over-Year. August’s year-over-year increase in producer prices is the largest on record. Labor and materials
shortages and supply chain bottlenecks contributed to the price increases. Regarding inflation, the CEO of Union Pacific said in an interview last week that “it doesn’t look like it’s temporary,” and that cargo congestion will likely continue well into next year.

Week Ahead

With all the global central bank commentary last week, anticipation is building for the Fed’s next meeting on September 21-22. This week presents plenty of additional data. U.S. CPI is reported on Tuesday, and consumer inflation updates from Germany, the UK, and Canada will also filter in this week. U.S. manufacturing numbers are expected to decline, with updates coming in the Empire State and Philly Fed indexes along with the industrial production report. U.S. retail sales have stalled over the past 3 months, and Thursday’s August report is anticipated to show a continued drop. China’s retail sales are likely to weaken considerably Year-over-year. The week finishes up with UK retail sales and U.S. consumer sentiment.

Year-to-date index performance; Dow up 13.07%, S&P up 18.7%, and Nasdaq up 17.28% 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.