​The Markets
 
Investors look to the future.
 
Last week, employment and manufacturing data confirmed that the United States economy continued to strengthen in November, but positive economic news was overshadowed by investors’ concerns about the spread of coronavirus and Federal Reserve policy.
 
Let’s start with the economic news.
 
More Americans were working. The Bureau of Labor Statistics (BLS) reported that unemployment dropped to 4.2 percent in November – a level the country wasn’t expected to achieve before 2024, according to Eli Rosenberg of The Washington Post. The labor force participation rate improved, too, meaning that more people are returning to work.
 
Fewer new jobs were created than analysts expected, but that wasn’t surprising given the BLS’ track record during the pandemic. From June through September, it underestimated employment gains by 626,000, according to Andrew Van Dam of The Washington Post. In the latest report, the BLS revised October’s numbers to be higher by 15,000.
 
Manufacturing strengthened. The manufacturing industry made gains in November, too. The Institute for Supply Management Purchasing Managers’ Index (PMI) came in at 61.1 for November. The reading for new orders, which measure future demand, was 61.5. “A [PMI] level of 50 indicates that the manufacturing economy is growing. Above 60 is a very strong level,” reported Allen Root of Barron’s.
 
Positive economic data didn’t inspire investors last week, though. That may be because economic data reflects what has happened in the past. Investors are more concerned about what may happen in the future and how markets may be affected. As a result, investors focused on:
 
The Omicron variant spread. Last week, a new variant of the coronavirus spread in the U.S. states. Initial indications suggest Omicron may be milder than previous variants, reported Deena Beasley of Reuters. However, that did not quell investors’ concerns. Josh Nathan-Kazis of Barron’s reported:
 
“Fearing new lockdowns that had been ruled out as recently as a week ago, investors are at times panic-trading based on anecdotes and passing comments by CEOs. The S&P 500 index moved more than 1% nearly every day this week, gyrating up and down on new guesses about what Omicron will mean for the world.”
 
Federal Reserve policy changes. Investors pondered Fed Chair Jerome Powell’s testimony before the Senate Banking Committee. Powell “…reiterated that he and fellow policymakers will consider at their upcoming meeting a faster wind-down to the Fed's bond-buying program, a move widely seen as opening the door to earlier interest rates hikes,” reported Jonnelle Marte and Lindsay Dunsmuir of Reuters. Historically, rising interest rates have slowed economic growth.
 
Major U.S. stock indices finished the week lower, according to Ben Levisohn of Barron’s. U.S. Treasury yields moved lower.

​The Markets
 
COVID-19 strikes again.
 
Coronavirus cases have been on the rise in Europe, climbing from about 700,000 new cases a week in September to 2.6 million a week in November, reported Richard Pérez-Peña and Jason Horowitz of the New York Times. As Thanksgiving approached, there was concern that travel and togetherness could increase the number of cases in the United States, too, creating stress on already taxed healthcare systems. Jamie Smyth and Caitlin Gilbert of the Financial Times explained:
 
“…what was expected to be a celebration has become fraught with danger in some Midwestern states, where vaccination rates are low and COVID-19 cases are rising rapidly after a summer lull…Nationally, cases have increased by nearly 30 percent since the beginning of the month…”
 
Financial markets took the fall surge in stride. They were less sanguine when news broke last week that a new variant of coronavirus, called “omicron,” had been identified in South Africa and was spreading.
 
Little is currently known about omicron. In Nature, Ewan Callaway reported the variant has a significant number of mutations, which is concerning. Scientists are tracking omicron’s spread and working to “understand the variant’s properties, such as whether it can evade immune responses triggered by vaccines and whether it causes more or less severe disease than other variants do.”
 
Global stock indices and oil prices dropped sharply on Friday, which was a holiday-shortened trading day, reported Chris Prentice and Carolyn Cohn of Reuters. U.S. Treasury bonds rallied as bond prices were pushed higher by investors seeking lower-risk opportunities. FactSet reported:
 
“[The Standard & Poor’s 500 Index] logged its worst day since late February and all major indices finished the week in negative territory. All sectors ended lower with moves highly influenced by today's [COVID-19] variant concerns…Healthcare held up best...”
 
Although it was overshadowed by news of a new coronavirus variant, the pace at which the Federal Reserve will tighten monetary policy (to keep inflation in check) also was on investors’ minds last week. Reuters reported that strategists at Goldman Sachs expected the Fed to tighten faster than anticipated, suggesting that interest rates could move higher sooner.

Please take note of our change in office hours for the Thanksgiving Holiday.  Our office will be closed Thursday, November 25.  Friday, November 26, our office will be open from 10:00 am until 3:00 pm.
  
The Markets
 
Thinking about the possibilities.
 
The Standard & Poor’s (S&P) 500 Index finished last week slightly higher and has gained about 6 percent during the past 25 days; however, investors have curbed their enthusiasm. The S&P 500 hasn’t experienced a move of one percent or more in 25 trading days. That’s the longest period without a move of that size in about two years, according to a source cited by Avi Salzman of Barron’s.
 
It’s possible investors are taking time to think about the current mix of conditions and how the economy and financial markets may be affected. For example:
 

• Consumers have said they’re concerned about inflation. The University of Michigan’s Consumer Sentiment Index declined in early November on a year-to-year and a month-to-month basis. Survey participants indicated their outlook was negatively affected by inflation concerns, reported Surveys of Consumers Chief Economist Richard Curtin.

 

• Retail sales were higher than expected. There was a difference between what consumers said and what they did. Despite inflation concerns, retail sales were up 1.7 percent from October to November and 16.3 percent year-over-year, reported Jeff Cox of CNBC.

 

• Companies were very profitable during the third quarter. Supply chain issues and inflation were frequently mentioned by companies during earnings calls, but they didn’t affect corporate profits. The majority (82 percent) of companies reported higher than expected earnings per share. On average, company profits were up 39 percent year-over-year, which was the strongest growth since 2010, reported John Butters of FactSet.

 

• The oil shortage may already be over. Oil prices dropped last week. A surge of COVID-19 cases in Europe is expected to slow demand just as supplies may increase as some countries begin to release oil from strategic petroleum reserves, reported Avi Salzman of Barron’s. During the past decade, oil prices have accounted for about 56 percent of the price of a gallon of gasoline, according to the U.S. Energy Information Administration. As oil prices fall, gasoline prices also may move lower.

 
The performance of major U.S. stock indices was mixed last week, according to Avi Salzman of Barron’s. The yield on 10-year U.S. Treasuries dropped last week.
 
We hope you have a wonderful Thanksgiving.

Please take note of our change in office hours for the Thanksgiving Holiday.  Our office will be closed Thursday, November 25.  Friday, November 26, our office will be open from 10:00 am until 3:00 pm.
 
 The Markets
 
Economists like to joke that inflation is just right when no one notices it.
 
Last week, investors noticed it. The Consumer Price Index (CPI), which is a measure of inflation, rose 0.9 percent in October and 6.2 percent over the last 12 months, according to the Bureau of Labor Statistics. (When volatile food and energy prices were excluded, the CPI was 4.6 percent for the period.)
 
That’s the highest level for inflation in 30 years, according to The Economist, and well above the United States Federal Reserve’s policy goal of two percent inflation over the longer term.
 
Uncertainty about the nature of inflation has left the U.S. Federal Reserve wedged in an uncomfortable policy position. The Economist explained: 
 
“As inflation has accelerated economists and officials have debated whether it is a transitory phenomenon—reflecting overstretched supply chains—or a more persistent problem. It is far more than an academic debate. If inflation is short-lived, the right move for the Federal Reserve would be to look through it, aware that jacking up interest rates may do more harm than good. If, however, inflation is stubbornly high, the central bank is duty-bound to tame it,”
 
Taming inflation could mean tapering bond buying and raising rates more quickly than planned and higher rates tends to slow and, sometimes, stall economic growth.
 
When making policy decisions, Personal Consumption Expenditures (PCE) is the Fed’s preferred inflation gauge. The readings for the CPI and the PCE rely on information from different sources.
 
“The CPI uses data from household surveys; the PCE uses data from the gross domestic product report and from suppliers. In addition, the PCE measures goods and services bought by all U.S. households and nonprofits. The CPI only accounts for all urban households,” reported Fanglue Zhou of Callan Associates.
 
PCE data will be released on November 24.
 
Major U.S. stock indices retreated a bit last week, according to Ben Levisohn of Barron’s, leaving the Standard & Poor’s 500 Index up 24.7 percent year-to-date. The yield on 10-year U.S. Treasuries rose last week.

​The Markets
 
Feeling bullish…
 
Investor bullishness ticked higher last week on all four investor sentiment gauges tracked by Barron’s. Investor optimism may have been fanned by positive financial and economic news. For example, last week:
 
The jobs report was better than expected. Last week, the Bureau of Labor Statistics (BLS) reported that 531,000 new jobs were added in October, lowering the unemployment rate to 4.6%. In addition, the employment numbers for August and September were better than previously reported. The BLS Employment Diffusion Index measures the breadth of employment gains across the economy. It rose from 63.6 in September to 71.8 in October for private industry, and from 57.3 to 70 in manufacturing. The increase suggests that job gains were spread across diverse industries rather than concentrated in specific ones.
 
Central banks took a measured approach to policy changes. Investors who were concerned that central banks might pull back stimulus too soon were reassured last week. The U.S. Federal Reserve announced that it will begin tapering its bond buying program, and that the Federal Open Market Committee is not talking about raising rates yet, reported MarketWatch. In addition, the Bank of England surprised investors by not raising rates last week, reported Elliot Smith of CNBC.
 
Corporate earnings remained strong. Companies’ profits increased during the third quarter. So far, 81% of the companies in the Standard & Poor’s 500 Index have reported a positive earnings surprise, reported John Butters of FactSet. (A positive earnings surprise occurs when earnings are better than analysts expected.) So far, the blended earnings growth rate for the S&P 500 was 39.1 percent in the third quarter.
 
Major U.S. stock indices finished the week at record highs, again, according to Randall W. Forsyth of Barron’s.9 U.S. Treasuries rallied, too.

The Markets
​
The road to recovery is slow and bumpy.
 
Last week, we learned that economic growth slowed in the third quarter as a new wave of COVID-19 surged across the United States, reported The Bureau of Economic Analysis. Gross Domestic Product (GDP), which is the value of all goods and services produced in the United States, increased by 2 percent annualized in the third quarter.
 
Consumer spending dropped sharply during the period. The change may reflect the limited availability of goods due to supply-chain issues, a reluctance to pay higher prices, or a drop in disposable personal income. Jeff Cox of CNBC reported:
 
“Spending for goods tumbled 9.2%, spurred by a 26.2% plunge in expenditures on longer-lasting goods like appliances and autos, while services spending increased 7.9%, a reduction from the 11.5% pace in [the second quarter]. The downshift came amid a 0.7% decline in disposable personal income, which fell 25.7% in [the second quarter] amid the end of government stimulus payments. The personal saving rate declined to 8.9% from 10.5%.”
 
Despite slower economic growth and lower consumer spending, many companies remained highly profitable during the third quarter. At the end of last week, John Butters of FactSet reported:
 
“At this point in time, more S&P 500 companies are beating EPS [earnings-per-share, which is a measure company profits] estimates for the third quarter than average, and beating EPS estimates by a wider margin than average…The index is now reporting the third highest (year-over-year) growth in earnings since [second quarter] 2010. Analysts also expect earnings growth of more than 20% for the fourth quarter and earnings growth of more than 40% for the full year.”
 
It appears that public companies remain adaptable and resilient despite the ongoing challenges created by the pandemic.
 
Last week, the three major U.S. stock indices finished the week at record highs, according to Ben Levisohn of Barron’s. The Treasury yield curve flattened as yields on longer-term U.S. Treasuries also moved lower.

​The Markets
 
It’s MESSI!
 
No, this commentary is not about Lionel Messi, the Argentine soccer phenom who is widely regarded one of the greatest footballers of all time. However, it is about something that economists say may be as rare as Messi’s talent: Moderating Expansion with Sticky Supply-driven Inflation (MESSI).
 
You can see why we prefer the acronym.
 
MESSI is a type of inflation that occurs when “strong, but cooling demand is met by constrained, but accelerating supply, leading to transitory, yet sticky inflation.”1 The coronavirus pandemic may have produced just the right circumstances, according to Gregory Daco of Oxford Economics.
 
“Initially, extreme health conditions, severe social distancing measures, and unprecedented fiscal transfers to households supported a surge in spending on goods. With domestic and international supply struggling to rebound quickly and inventories being run down, prices for goods surged. Later, as the health situation improved, the re-opening of the economy led to greater demand for services which also ran into the tight supply conditions, leading to higher service sector inflation.”
 
The recent rapid rise of inflation has many people concerned that we may experience runaway inflation, which occurs when prices rise rapidly, or stagflation, which occurs when economic growth slows while inflation rises. Daco doesn’t believe either will prove to be the case:
 
“It’s not runaway inflation, and it’s certainly not stagflation…In the debate between transitory and runaway inflation, we have repeatedly said that the truth lies somewhere in the middle, with inflation likely to be ‘sticky but not oppressive.’”
 
The baseline view from Oxford Economics is that higher inflation will persist into the first half of 2022 before falling back to about two percent by the end of next year.
 
Time will tell.
 
Last week, the Dow Jones Industrial Average closed at a record high, and the Standard & Poor’s 500 Index and Nasdaq Composite also finished higher, according to Ben Levisohn of Barron’s. The yield on 10-year U.S. Treasuries also moved higher.

​The Markets
 
Don’t get spooked!
 
Barron’s Big Money Poll is an exclusive survey of market sentiment among professional investors. Last week, Nicholas Jasinski reported on 2021’s findings:
 
“America’s money managers are optimistic about the long-term outlook for the economy, the financial markets, and the recovery from the [COVID-19] pandemic. It’s the short-term prognosis that concerns them. Monetary and fiscal policies are in flux. Supply-chain bottlenecks and labor shortages are igniting inflation and threatening corporate profit margins, and the economic recovery from 2020’s recession –so robust until now – is decelerating. Add pricey stock valuations and rising bond yields, and the immediate future suddenly looks more challenging than the recent past.”
 
Among those surveyed by Barron’s, half are bullish about prospects for the next 12 months, down from 67 percent last spring. Twelve percent are bearish, up from seven percent last spring, and the rest are neutral. Fifty percent said stock markets are fairly valued at current levels, and 80 percent anticipate a stock market correction – a drop of about 10 percent from a recent high – during the next six months.
 
Market corrections are not all that unusual. The average correction lasts a few months, reported James Chen on Investopedia. That’s long enough, though, for loss aversion to kick in. Research has found that, psychologically, the pain from loss is twice as powerful as the pleasure from gain. As a result, when markets decline, loss aversion causes some investors to wonder whether they should make changes to their investment strategies and that can have a negative impact on long-term financial goals.
 
There is no way to know whether a correction is ahead. That said, if a market downturn has you wondering about your investment strategy, please get in touch. We can discuss whether changes should be made.
 
Last week, major U.S. indices finished the week higher, and the yield on a 10-year U.S. Treasury moved lower.

​The Markets
 
The word “jouncy” may have started life as a combination of bouncy and jolting – and it’s a pretty good way to describe what happened to stock markets last week.
 
The week started with the Standard & Poor’s 500 Index experiencing daily gains and losses of about one percent. Other major U.S. indices saw sizeable daily swings in value, too. Lu Wang of Bloomberg reported:
 
“The harrowing reversals reflect a particularly stark divide between bull and bear cases in markets right now. On one side, risk appetites are being constricted by lingering uncertainty over the government debt ceiling, tightening Federal Reserve policy and disrupted supply chains. At the same time, sentiment is being buttressed by improving [COVID-19] trends, an economy that keeps chugging along and forecasts for more double-digit earnings growth from corporate America.”
 
Considering how volatile things were early in the week, investors were remarkably sanguine about Friday’s less-than-stellar employment report. The Bureau of Labor Statistics indicated that less than 200,000 jobs were created in September.3 According to Ben Levisohn of Barron’s, the number was below expectations and provided relatively little insight to economic growth.
 
“Yes, the U.S. added just 194,000 jobs in September, well below forecasts for 500,000, and that’s the kind of miss that would suggest a slowing economy. The number, though, was close to meaningless, given the seasonal adjustments – which may have skewed it lower – and by comparison to the household survey, which showed more than 500,000 new jobs as the unemployment rate fell to 4.8%. Try making an investment decision off that.”
 
Consumers, investors, and central bankers are also expending a lot of energy worrying about power – the kind that’s generated by natural gas, oil, coal, wind, sun and other sources. Supply and demand issues in energy markets have caused prices to rise and is pushing inflation higher, according to Julia Horowitz of CNN Business.
 
Major U.S. indices finished the week higher, although the Nasdaq Composite’s gain was just 0.1 percent. The yield on a 10-year U.S. Treasury rose to 1.6 percent.

September strikes again…
 
If you look back over the last 20 years, September has been the worst performing month for the Standard & Poor’s 500 Index, according to Nasdaq.
 
This year, the S&P 500 dropped 4.8 percent in September. That wasn’t enough to wipe out gains from earlier in the third quarter, and the Index finished the quarter slightly higher. The Dow Jones Industrial Average and the Nasdaq Composite Index also tumbled in September. Their losses erased the previous two month’s gains, so the Dow and Nasdaq finished the quarter lower than they started it, reported Caitlin McCabe and Caitlin Ostroff of The Wall Street Journal.
 
Investors had a lot to consider during September and over the third quarter, including:
 

• Resurgence of the coronavirus. On July 1, the seven-day moving average of coronavirus cases in the United States was about 14,500. Early September, the average had rocketed to about 170,000. By the end of September, the average was trending lower, reported the Centers for Disease Control.  One result of COVID-19 is that life expectancy at birth fell from 2019 to 2020. In the United States, life expectancy at birth has fallen by more than one year. Italy, Poland and Spain also have seen life expectancy drop by more than one year, reported The Economist. Lifespan increased in two countries: Denmark and Norway.

 

• Global economic growth concerns. The resurgence of COVID-19 also dented global business executives’ confidence that the world economy will improve during the next six months, according to latest McKinsey Global Survey. While the majority (71 percent) of those surveyed said that economic conditions will improve in the coming months, the number was lower than the prior quarter’s 81 percent. Survey respondents said the top risks to economic growth were the pandemic, supply chain disruptions and inflation.

 

• Supply chain disruptions. The supply chains issues created by the pandemic have not been easy to resolve. David Lynch of The Washington Post reported:  “The commercial pipeline that each year brings $1 trillion worth of toys, clothing, electronics and furniture from Asia to the United States is clogged and no one knows how to unclog it…the median cost of shipping a standard rectangular metal container from China to the West Coast of the United States hit a record $20,586, almost twice what it cost in July, which was twice what it cost in January, according to the Freightos index. Essential freight-handling equipment too often is not where it’s needed, and when it is, there aren’t enough truckers or warehouse workers to operate it.” Toward the end of September, more than 70 container ships were anchored near the West coast, waiting for a berth to open so goods could be delivered.  

 

• Rising inflation. The cost of producing goods has been increasing. “The producer price index, a proxy for corporate or wholesaler costs, has risen for eight months in a row and, in August, was up 10.5% from a year earlier, the highest reading since June 1981. Compare this to the consumer price index, a proxy for realized manufacturer or retailer prices, which was up 5.3%. This 5.2-percentage-point gap is one of the largest in more than 40 years, suggesting higher costs are outpacing merchant end-prices…,” reported Lisa Shalett of Morgan Stanley. When producer costs rise faster than consumer prices, companies’ profitability may drop and that could negatively affect earnings.

 

• Tightening central bank policy. The Federal Reserve is concerned about inflation, too, and is considering a move toward less accommodative monetary policy. In late September, Federal officials indicated that tapering – slowly reducing monthly purchases of securities – could begin later this year. Once purchases have ended, the Fed could begin to raise interest rates in late 2022 or 2023, depending on how the economy is growing, reported Jonnelle Marte of Reuters.

 
As if these issues weren’t enough, investors also had to process the potential effects of a global energy crisis, China’s regulatory crackdown, and another U.S. debt-ceiling standoff.
 
Despite these challenges, the fourth quarter got off to a good start on Friday. Eighty percent of the companies in the S&P 500 saw their share prices rise. The S&P 500 gained 1.2 percent for the day, while the Dow rose 1.4 percent, and the Nasdaq gained 0.8 percent, reported Jacob Sonenshine and Jack Denton of Barron’s.