After a weak start to the week, equity markets bounced on economic signals and positive earnings surprises. Higher energy prices continued and retailers struggling to build inventories for the holiday season caused by supply chain and transportation disruptions grabbed the attention of investors initially; By the end of the week, supply chain and inflation worries were replaced with more optimistic data points suggesting supply and inflation might be peaking. The TSX jumped 2.66% on the week, the S&P 500 gained 1.82%, the Nasdaq advanced 2.18, the S&P 400 Mid-Cap increased 2.16%, and the Russell 2000 gained 1.46%. European equity markets followed suit, led by France’s CAC 40 gaining 2.55%, the German Dax Index jumping 2.51%, the UK FTSE Index increasing 1.95%, and Italy’s FTSE MIB index gaining 1.68%. In Asia, the Nikkei 225 Index bounced 3.64%, and in China, the large-cap CSI Index increased a mere 0.3%, while the Shanghai Composite lost 0.6%.
Earnings season started with 8% of the S&P companies reporting with 80% earnings above estimates, above the five-year average of 76%. Companies are reporting in aggregate earnings 14.7% above estimates beating the five-year average of 8.4%. Companies reporting in the technology, health care, and real estate sectors led with all other sectors enjoying significant positive surprises. In terms of revenues, 83% of companies reported revenues exceeding estimates by 3%, above the five-year average of 1.4%.1
Last Tuesday, the Bureau of Labor and Statistics’ job openings report declined to 10.4 million from the series high in July of 11.1 million. The quit rate also increased to 2.9% overall and 3.3% for private companies, the highest recorded figures since the Bureau began tracking in 2000. A record 4.27 million people left jobs in August.2 A high quit rate usually occurs when people think the economy is doing well and can find a better job. This time the data may be skewed because of forced vaccination requirements for workers resulting in shortages in health care, emergency workers, transportation, and airline pilots, to mention a few.3 Also, on Tuesday, the Atlanta Federal Reserve President Raphael Bostic, speaking at the Peterson’s Institute of International Economics, said higher prices are now spreading beyond a handful of products like autos and lumber to a broader range of products, and inflation is likely to be more persistent, lasting into 2022 and possibly longer.4
On Wednesday, the government released the latest Consumer Price Index for September, rising 0.4%, and over the last 12 months, all index items increased by 5.4%. Once again, food (increasing by 0.9%) and shelter (rising by 1.2%) contributed more than half of the total increase. Energy also increased by 1.3% and gasoline by 1.2%. Over the last 12 months, the energy index has increased 24.8%, while food increased 4.6%.5 Higher prices caused by shortages are showing little end in sight, and rather than “transitory,” could become more permanent than initially thought, forcing the Fed to rethink its policy timeline.
For the week ending October 9, initial job claims were 293,000, a decrease of 36,000 from the last week. This claims number is the lowest level since March 14, 2020. Continuing claims decreased 523,426 from the previous week to 3,649,013 compared to last year at this time of 24,902,586.6 Retail sales saw a solid increase of 0.7% for September, after 1% in August, compared to a Wall Street Journal poll of economists’ expectation of a 0.2% decline. The strong number in retail sales reflects, in part, higher prices consumers are paying for gas (up 1.8%) and food (up 0.7%). The only categories reporting a decline in sales were health, electronics and personal care.7
The unintended consequences of public health requirements to slow the spread of Covid may have pushed economic growth into 2022 as bottlenecks and supply chain disruptions become resolved with time. Continued steady growth for Q4 and into 2022 supports equities, provided investors do not become rattled by a change in Fed policy and other government mandates in the coming months.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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