​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.