Equity markets staged an impressive week due to several factors, including investor sentiment helped along by comments from the US Fed Chairman, strong corporate earnings, job gains, and news that Pfizer was testing a Covid pill in a clinical trial that, to date, has reduced hospitalizations and deaths. The three major US indices reached new highs with tech outperforming value, and oil sliding when the Biden administration suggested releasing supply from the strategic petroleum reserves. Small-caps were the big winners, with the Russell 2000 jumping 6.09% in the week, followed by the S&P 400 Mid-Cap Index gaining 3.97%. The TSX advanced 1.43% during the week, the Nasdaq 3.05%, and the S&P 500 gained 2.00%.
European equity markets enjoyed similar gains with help from earnings surprises and comments from the European Central bank that interest rates would remain low for some time. The STOXX Europe 600 Index gained 1.67%, the German DAX rose 2.33%, the French CAC 40 jumped 3.08%, Italy’s FTSE MIB Index advanced 3.42%, and the UK’s FTSE gained 1.25%.
According to FactSet, to date, 89% of the S&P 500 companies have reported EPS results for Q3. Of those reporting companies, 81% beat expectations, exceeding the five-year average of 76%. In aggregate, companies are beating the estimates by 10.3%, above the five-year average of 8.4%. Healthcare and financials were the top contributors to the overall increase in earnings surprises. Seventy-five percent of the reporting companies have recorded revenues above estimates, which is higher than the five-year average of 67%. In aggregate, companies have reported revenues 2.9% above estimates, which is higher than the five-year average of 1.4%. For the third quarter, the energy, financial and healthcare sectors were the largest contributors to the increase in revenues.1
The ADP National Employment Report released last Wednesday revealed private sector employment increased by 571,000, exceeding expectations of economists surveyed by the Wall Street Journal who forecasted a gain of 395,000. The service-providing sector added 458,000 jobs, while the goods-producing sector added 113,000 jobs. With the decrease in the number of Covid cases, it is not surprising leisure and hospitality accounted for 185,000 of the new jobs within the service-providing sector. Also in the service sector, professional and business industries accounted for 88,000 of the new jobs, and the education and health industries accounted for 56,000 new jobs combined. Meanwhile the construction and manufacturing industries each represented over 50,000 jobs in the goods-producing sector.2 The US Labor Department’s broader survey is released after the ADP report and is considered a more accurate reflection of job gains. Recently the surveys have not agreed. Despite the current accelerated pace of hiring, more than 10 million jobs remain unfilled in both the service and manufacturing sectors.3
Another indication of the impact of a slowing number of Covid cases was the ISM (Institute for Supply and Management) survey reporting an increase in September to 66.7% from 61.9% in August. A reading above 50% indicates expansion, and a reading above 60 is considered exceptional. The ISM survey also beat Wall Street economists’ forecasts of 62%.4
Last Wednesday, Chairman Powell’s statement that the Federal Reserve would commence tapering asset purchases by $15 billion per month in both November and December seemed to go unnoticed by the equity markets. Further, the tapering of asset purchases did not imply any direct signal regarding interest rate policy. Based on the assumed asset purchase reduction rate of $15 million per month, the speculation is an 8-month timeline to complete the bond-buying program. The eight-month timeline to complete asset purchases will provide the Fed with time to determine if inflation is transitory or more permanent.5
Last Thursday, the Department of Labor released the initial jobs claims of 269,000, a 14,000 decrease from the previous week. This is the lowest level since March 14, 2020, reading of 256,000. Continuing claims also dropped 157,731 to 2,672,948. One year ago, there were 22,013,937 filing for claims in all programs.6
Equity market volatility is expected to pick up as we enter 2022. With the political infighting becoming more aggressive, investor sentiment will be challenged to remain positive. Furthermore, inflation is likely to be more sticky, particularly concerning energy costs and food, thus slowing economic recovery as we move into the new year.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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