Economic Update 11-08-2021
- Economic data for the week included the Federal Reserve beginning its ‘taper’, coupled with weaker manufacturing results, but new all-time highs in services sentiment. The employment situation report for October surpassed expectations, reversing disappointment of the prior month.
- Global equity markets gained with continued economic and earnings improvement, and less hawkish-than-expected world central bank policy. Bonds fared well globally as interest rates declined. Commodities ended the week mixed, with declines in energy and industrial metals offset by gains in precious metals.
U.S. stocks continued their gains on the back of a Fed beginning their taper, but with a ‘dovish’ tone, strong economic data, and positive surprises in corporate earnings. Small caps sharply outperformed large caps. By sector, consumer discretionary, technology, and materials led with gains over 3%; financials and healthcare were the laggards with negative returns. Real estate gained nearly a percent, led by malls and retail, benefitting from lower interest rates.
The Q3 earnings season has been solid, even more so than expected. Per FactSet, 89% of S&P firms have reported, with 81% of these experiencing a positive earnings surprise and 75% having a revenue surprise. The overall year-over-year earnings growth rate currently lies at 39%. A good percentage of these have been in financials (as write-off reserves have been lowered) and energy (with higher petroleum prices passed on to consumers). However, a variety of consumer discretionary and industrial firms (such as airline travel) have outperformed low expectations. Full year 2021 earnings growth is anticipated to be in the range of 45%, with revenue up 15%. Earnings and revenue growth for 2022 are unsurprisingly expected to normalize to 9% and 7%, respectively (obviously all subject to change on a near-weekly basis).
Profit margins also continue to expand, with commentary from a variety of companies alluding to how recent rising costs have been passed through to consumers. Interestingly, this might be easier for consumers to bear, since the narrative about rising cost expectations is so pervasive. (By contrast, it’s harder for a single company to do it arbitrarily and not face pushback eventually.) Of course, there’s likely a limit to this.
Foreign stocks in Europe and Japan gained in line with U.S. equities, while the U.K. lagged. As in the U.S, a strong earnings recovery and dovish central bank tone appeared to drive sentiment. Emerging markets ended with a flattish week on net, with most nations in the positive, except for China, which declined as new Covid cases surged and additional real estate developers experienced liquidity problems.
U.S. bonds experienced large gains as investors appeared satisfied with the Fed’s discussion following the FOMC meeting. Investment-grade and high yield corporate bonds both outperformed treasuries slightly, although bank loans also experienced gains.
In keeping with the expected FOMC taper announcement, the U.S. treasury yield curve has changed shape. Along with the predicted timeline of rate hikes, the 2-year has risen relative to longer maturities, which has flattened the curve. Also, the 30-year bond yield fell below the 20-year, representing a partial curve inversion. This was an indicator that perhaps the market fears the Fed may raise rates to the point where a recession becomes more likely in coming years. The general flattening of long treasury rates has been an indicator that economic slowing fears are beginning to overtake the bullishness demonstrated by a upwardly-sloping yield curve.
Foreign bonds also saw gains over 1% in both developed and emerging markets, despite little change in the dollar. The Bank of England voted to keep rates at 0.1%, rather than raise them to 0.25%, which had been expected due to their recent rhetoric about inflation concerns (although the rate there is lower than in the U.S. currently). Interestingly, they also voted to maintain their bond purchasing program. While inflation concerns continue to be higher in Europe (despite lower levels than in the U.S.), economic growth is also lower, tempering the need for a move to hawkish policies.
Commodities fell back generally, with declines in energy and industrial metals offset by gains in precious metals. The price of crude oil fell by nearly -3% to over $81/barrel. The OPEC+ group decided to keep production unchanged, despite protests from world leaders, such as President Biden, that high energy prices were straining the Covid recovery. This came with threats to tap the U.S. strategic petroleum reserve, which helped ease prices a bit, as did the scheduled resumption of nuclear talks with Iran (which, if resulting in an end to sanctions, resumed oil output).
|
Period ending 11/5/2021 |
1 Week (%) |
YTD (%) |
|
DJIA |
1.43 |
20.47 |
|
S&P 500 |
2.03 |
26.56 |
|
NASDAQ |
3.08 |
24.59 |
|
Russell 2000 |
6.11 |
24.35 |
|
MSCI-EAFE |
1.64 |
12.83 |
|
MSCI-EM |
-0.04 |
-0.31 |
|
BBgBarc U.S. Aggregate |
0.64 |
-0.95 |
|
U.S. Treasury Yields |
3 Mo. |
2 Yr. |
5 Yr. |
10 Yr. |
30 Yr. |
|
12/31/2020 |
0.09 |
0.13 |
0.36 |
0.93 |
1.65 |
|
10/29/2021 |
0.05 |
0.48 |
1.18 |
1.55 |
1.93 |
|
11/5/2021 |
0.05 |
0.39 |
1.04 |
1.45 |
1.87 |
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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