Halloween Can’t Spook the Equity Markets

By Jack Kraft, Advisor Directed Portfolio Analyst

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Halloween season did very little to spook an ounce of fear into investors this October. Last week was filled with a flurry of corporate earnings reports, important economic data, and negotiations on Capitol Hill. Despite the busy week of news, market participants continued to pile into U.S. equities with growth stocks outperforming their value counterpart. The S&P 500 finished the week up 1.4% and notched its strongest monthly performance (+7.0%) this year. Elsewhere, WTI crude snapped a nine-week winning streak, while the U.S. treasury curve flattened ahead of next week’s Fed meeting.

Investor sentiment was bolstered last week in large part due to robust third-quarter earnings reports, despite disappointing results from Big Tech that attempted to fog the picture. As of Friday, roughly 56% of S&P 500 constituents had reported profit tallies. Of those companies, 82% beat expectations on the bottom line (Earnings Per Share), while 75% had exceeded revenue expectations. If this pace continues it will stack up as the fourth highest percentage of S&P 500 companies reporting a positive earnings surprise since the metric has been tracked by FactSet in 2008.

For the week, all three major averages managed to notch record closing highs. Seven of the 11 S&P 500 sectors finished the week in positive territory with the Consumer Discretionary sector pacing the gains. The Energy sector declined with WTI crude falling 0.9% on the week. WTI crude saw its first choppy week of trading in several months amid an increase in supply expectations. Iran moved one step closer to bringing back online its oil exports amid rumors of the country’s willingness to revive an international nuclear deal. Despite the early week volatility, oil declines were only modest following a Friday report that OPEC+ plans to maintain current production cuts.

In economic data, supply chain constraints are beginning to be reflected in economic reports as they take a toll on the U.S. economy. The first print of third-quarter U.S. GDP came in at 2%, below consensus expectations of 2.8% and the slowest growth rate for the economy in the pandemic-era recovery. The slowdown in growth was partially attributed to a clogged global supply chain. Investors also received an update on inflation. Over the past 12 months through September, the core PCE price index rose 3.6%. The core PCE price index is considered the Fed’s proxy for inflation and currently sits well above its long-run target of 2%. Meanwhile, wages rose by the most on record in the third quarter as employers compete for a limited number of workers. On a year-over-year basis labor costs surged 3.7%, which is the largest rise since the fourth quarter of 2004.

In my opinion, wage growth, an economic data point that typically flies under the radar, should continue to be monitored. Typically, an increase in wages is seen as a positive because it can give consumers more purchasing power, however, it can also be a clue into inflationary pressures building in the broader economy. In fact, when an increase in wages is not correlated to productivity gains companies have two options. Either one: accept lower profits or two: raise prices. Passing these prices onto consumers can lead to cost-push inflation. Cost-push inflation is defined by Investopedia as an overall price increase (inflation) due to increases in the cost of wages and raw materials. Since the demand for goods hasn’t changed, the price increases from production are passed onto consumers creating inflation pushed by cost.

The bond market has also been in focus ahead of the November Federal Reserve meeting. The U.S. Treasury yield curve has been flattening over the past month with short-term rates rising, while longer dated maturity yields have declined. The spread between the 2- and 10-year U.S. yields hit its narrowest level in two months this past week, while the spread between the 5- and 30-year yield narrowed to the flattest level since March 2020. The flattening of yield curve is not isolated to the U.S. and can be seen across global government yield curves as central banks gear up plans to withdraw an ultra-loose monetary policy. According to the FedWatch tool by CMEGroup, Fed fund futures are currently pricing in a 47.7% chance for at least three rate hikes by the end of 2022, up from a 7.3% probability one month ago.

This coming week will feature a jam-packed slate of corporate earnings reports, central bank news, and economic data. Headlining the economic calendar will be the non-farm jobs report, which is expected to increase by 385,000 above last month’s disappointing gain of 194,000. Elsewhere, separate updates on manufacturing PMI and non-manufacturing PMI from the Institute of Supply Management (ISM) are expected to decline slightly. On Thursday, investors are highly anticipating the results of the FOMC meeting and will listen closely to Fed Chair Jerome Powell’s press conference for any clues on upcoming tapering and future plans for interest rate hikes. Third-quarter earnings season will continue to be in full swing this week as investors look for robust results to continue.

Date Report Previous Consensus
Monday 11/01/2021 ISM Manufacturing 61.10 60.30
Markit Manufacturing PMI 59.20 59.3
Tuesday 1/02/2021 No Notable Economic data releases
Wednesday 11/03/2021 Markit Services PMI 58.20 58.4
ADP Nonfarm Employment Change 568k 385k
ISM Non-Manufacturing PMI 61.90 61.80
Thursday 11/04/2021 Initial Jobless Claims 281K 282k
Continuing Jobless Claims 2.24M
Friday 11/05/2021 Nonfarm payrolls 194k 450k
Unemployment rate 4.8% 4.7%

 

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