Except for the TSX, North American equity markets paused last week as investors digested the jump in CPI and PPI and contemplated the response of central bankers. The TSX gained 1.02%, the S&P500 lost 31 basis points, Nasdaq dropped 69 basis points, the S&P MidCap 400 was flat, losing just ten basis points, and the Russell 2000 declined 1.04%. Consumer discretionary stocks led the retreat, followed by energy as crude backed off recent highs. The recent passage in the House of Representatives of the $1.2 Trillion infrastructure bill helped support the small materials sector. European equities shrugged off inflation fears and focused on the accommodative monetary policies fueling optimistic growth prospects. The STOXX European Index gained 68 basis points, Germany’s DAX gained a modest 25 basis points, France’s CAC 40 Index increased 72 basis points, the UK’s FTSE 100 Index rose 60 basis points. The Italian FTSE MIB Index was the exception and fell 23 basis points on the week.
Last Tuesday, the National Federation of Independent Business released its October small business confidence survey with a 0.9% decline to 98.2. The latest survey is the lowest since March. As in past surveys, small business owners struggle to take advantage of current growth opportunities due to the lack of skilled workers and inventory shortages. More troubling, however, is the fact that the percentage of small business owners expecting better business conditions over the next six months declined further by 4 points to a negative 37%. Forty-nine percent reported unfilled job openings.1
On Wednesday, initial unemployment claims showed a decrease of 4,000 to 267,000. Continuing claims decreased by 107,095 to 2,565,853.2 The Labor Department Jobs Opening and Labor Turnover Report showed job openings held steady at 10.4 million. Hires and separations followed suit at 6.5 million and 6.2 million, respectively. The number of quits in September was a series high of 4.4 million or 3% of the labor force. Usually, a high quits rate is an indication that the economy is doing well, and workers think they can find a better job. Before the pandemic, the quits rate average was 2.3%. As the economy continues to show improvement, the recovery speed depends on the millions of workers yet to return to work. Still, there remains over 10 million jobs to fill.
Also, on Wednesday, the Labor Department reported the Consumer Price index increased by 0.9% in October after rising 0.4% in September. The October increase brings the rate of inflation to 6.2%, the highest rate since 1990 and well above the Federal Reserve’s 2% target. The most significant contributors to the monthly increase were energy, food, used cars and trucks, and new vehicles. The energy component of the index rose 4.8%, with the gasoline index increasing 6.1%. Food rose 0.9% for the month. 3 The latest increase in inflation has many concerned that the Fed may be forced to raise rates sooner than initially thought. It appears, at least for now, the Fed Presidents remain split on the timing of the rate increases, although several of the Fed Presidents recently suggested the bank could raise rates in 2022 rather than 2023.4 The debate continues whether the current surge in inflation will ease and what elements of inflation are likely to moderate as supply chain bottlenecks recede with full employment. Energy inflation is one of the components expected to soften as oil prices retreat. Energy is somewhat weather-related and policy-driven as governments strive to limit the use of fossil fuels. Another component expected to ease is food production, which is held hostage to the weather and labor shortages. New and used cars are one of the most significant contributors to the latest inflation surge but it is expected to recede with full employment as production increases to meet demand.
In a rising rate environment with increasing inflation, investors may consider reducing fixed-income allocations and increasing equities in sectors that tend to do well in inflationary periods, including energy, financials, and industrials.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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