Most equity markets finished the week on a positive note after an inter-week bumpy ride. The week started with continuing the slide from the previous week. Several factors pressured markets lower, including remarks by President Biden that he could not guarantee the US would not default if the debt ceiling were not increased, higher oil prices, along with a prediction by St. Louis Fed President Jim Bullard that he expected higher core inflation of 2.8% next year versus the FOMC’s median participant prediction of 2.3.1 By the end of the week, Congress reached a debt ceiling compromise agreement by increasing the ceiling limit by $480 billion, allowing the government to pay bills until December 3.2
The TSX rose 1.55% propelled by higher oil prices; the S&P 500 gained 0.79%, the Nasdaq gained 0.09% as social media stocks came under pressure from congressional scrutiny on testimony from a Facebook whistleblower, and the Mid-Cap S&P 400 increased 0.25%. In comparison, the Russell 2000 lost 0.38%. Europe also experienced a volatile week but managed to finish the week in positive territory with the German DAX advancing 0.33%, France’s CAC 40 increasing 0.65%, Italy’s FTSE MIB index climbing 1.70%, and the UK’s FTSE 100 gaining 0.97%. In Japan, the Nikkei fell 2.51% on worries about global inflation, rising oil prices, the Chinese property market and the election of a new Prime Minister, and uncertainty of policy direction of the new government.
Last Monday, The Commerce Department reported factory orders rose 1.2% following a revised July .07% increase.3 Durable goods increased by 1.8% in August, with non-durable goods rising .06%.4 Thursday, the Labor Department reported seasonally adjusted initial claims falling to 326,000 from the previous week of 364,000. State continuing claims dropped by 98,000 to 2.71 million. Combined state and federal program claims tumbled to 4.71 million, down sharply from the beginning of the month.5
The most significant economic data of the week related to the ADP private-sector payrolls report on Wednesday, followed by the Labor Department’s non-farm payrolls release on Friday. The ADP reported employment increased by 568,000 jobs against the Wall Street Journal survey, expecting 425,000 jobs.6 Sectors adding the largest number of jobs were leisure and hospitality adding 226,000 jobs, education and health services adding 66,000, and professional and business services increasing by 61,000 jobs. Companies having more than 1,000 employees added 354,000, while small businesses with 1 to 19 employees added only 20,000 jobs.7
On Friday, The Labor Department reported employment rose by 194,000, and the unemployment rate fell to 4.8% from 5.2%. The Wall Street Journal forecast was for 500,000 new jobs. The sectors adding jobs were similar to the ADP report, except employment in the public sector declined, losing 123,000 jobs. Private sector jobs increased by 317,000, but state and local employment dropped 123,000 jobs for the net gain of 194,000. The participation rate fell slightly to 61.6%.8 The difference between the two reports stems from the data sources used to compile each report. The ADP report uses client payroll data and is thought to be skewed to larger employers over smaller employers.
In contrast, the Labor Departments survey is thought to be more diverse by employer and region. Because of the weak jobs report, speculation turned to the Fed’s plan of a November taper of asset purchases. In previous meetings, Fed Chairman Powell focused on employment growth as one of the critical indicators of economic growth and a return to normal before changing asset purchase policies.
Other concerns mentioned previously are the labor shortage in small businesses and the supply chain bottlenecks created by the lack of skilled labor. The labor shortages are challenging firms in several ways. The first challenge is how they handle labor shortages while trying to return to normal or grow their business. The second is how much they are going to have to pay workers to return to work. We have already seen labor unrest growing around the US in several sectors, including healthcare, academia, engineers and public transit workers, to mention a few.9 At the top of the list of demands are wages, working conditions, job safety, and job security. The third challenge is how employers manage increasing labor costs, materials, and transportation costs.
Corporate earnings season starting this week will be added to the list of headlines impacting investor sentiment, potentially creating market volatility. Hopefully, within a couple of weeks, the market will return to a more optimistic outlook for the remainder of the year before we start 2022 and what is likely to be a year full of social, political, and economic turmoil.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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