Supply Chain and Earnings Kick-Off

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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