Sightline Weekly Market Update: Will This Be September as Usual?
Equity markets in North America sagged in the week on worries on equity valuations, supply chain difficulties, and the prospect of the general market response to the inevitable monetary policy tapering. Economic data for the week was supportive. The energy sector benefited from higher oil prices, auto shares advanced while utilities and small material stocks lagged.
The TSX lost 0.28%, the S&P500 fell 0.57%, Nasdaq dropped 0.47%, S&P400 Midcap declined 0.32% while the Russell gained 0.42% on the week. Europe also struggled on variant worries with the German Dax index falling 0.77%, the French CAC 40 dropping 1.4%, and the UK’s FTSE losing 0.93%. Italy’s FTSE MIB index enjoyed a modest gain for the week.
Last Tuesday, the Small Business Optimism Index rose 0.4% in August to 100.1. Drilling down into the report, of the ten components of the index, five improved, four declined, and one remained unchanged. As mentioned many times, labor is one of the primary challenges facing small businesses, along with supply chain disruptions. The number of owners expecting better business conditions in the next six months declined by eight points to a net negative 28%. Over the past two months, the indicator had dropped 16 points. Fifty percent of owners reported unfilled jobs, which is a 48-year record high. Higher wages were reported by 41% of the owners with a net 26% expecting to raise wages in the next three months.1 Also, on Tuesday the Bureau of Labor Statistics reported the August CPI increased 0.3% after 0.5% increase in July. The largest increase was in energy, increasing 2.0%, and food rose 0.4%. Ex-energy and food, the index increased 0.1% in August. The Federal Reserve continues to think inflation will return to the 2% target later in the next year. If that turns out to be the case, peak inflation in this cycle maybe behind us, as well as peak GDP growth.2 The US Census Bureau on Tuesday stated the median income for American households slipped last year by 3% to $67,500. The poverty level also increased to 11.4% in 2020, up from 10.5% a year earlier. A household is considered at poverty level if a family of four, with two adults and two kids, earned less than $26,246 last year. If the Supplemental Poverty Measure is considered, 9% of families were in poverty compared to 11.5% a year earlier. The additional stimulus checks from the federal government kept over 11.7 million above the poverty line based on the data compiled by the U.S. Census Bureau.3
On Wednesday, The New York Fed’s Empire State business conditions index jumped 16 points to 34.4 in September. A survey of economists expected a reading of 17.2, slightly falling from the August reading of 18.3. The latest reading may not be too meaningful since the index hit a high in June at 43 and backed off to 18.3 in July. The new orders component and the shipments index also jumped 18.9 points to 33.7 and 22.5 points to 26.9 respectively.4
On Thursday, the Department of Labor released the initial unemployment claims for the week ending September 11. Claims increased by 20,000 from the previous week’s revised level of 310,000. The increase was attributed to damage done by hurricane Ida. The expectation is for the initial claims to resume the decline of previous months, as companies are struggling to find workers and the economy is expected to continue to grow, albeit at a slower rate than Q1 and Q2. Continuing claims for the week ending August 28 climbed 178,937 from the previous week to 12,106,727 but down for one year ago when continuing claims were 30,383,772.5
Historically, September and October are two of the most volatile months of the year for equity markets. With the specter of the Fed reducing asset purchases, stretched valuations, Covid variants resulting in restrictions for those not vaccinated, and expectations of tax increases, this year may prove to be no exception.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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