Economic Update 11-01-2021
- Economic data for the week included weaker-than-expected U.S. GDP growth for the third quarter, and declines in durable goods orders and pending home sales. However, home prices, new home sales, consumer confidence, and jobless claims all improved.
- Global equity markets were mixed, with gains in the U.S. offset by little change in Europe, and declines in emerging markets. Domestic bonds fared positively due to a decline in interest rates. Commodities featured little change in energy prices, and mixed results in grains and metals.
U.S. stocks continued to show positivity and news highs on the back of strong corporate earnings, as well as selected economic data, such as lower jobless claims (which indirectly equate to potentially stronger consumer spending, assuming the labor market continues to show repair). With about 56% of S&P companies having reported so far, the combined year-over-year earnings growth rate is a robust 37% (per FactSet), led by energy, materials, and industrials.
By sector, consumer discretionary rose over 4%, followed by arond-2% gains in technology, communications, and health care. In the consumer discretionary sector, Tesla rallied to a market cap of over $1 trillion (larger than the next top ten automakers combined) upon news of a deal with Hertz for a historic order of electric vehicles for rental. A variety of technology and consumer-related stocks, such as Apple and Amazon, declined along with quarterly call discussion of higher costs and supply bottlenecks affecting anticipated revenue and earnings strength. On the negative side, financial and energy stocks lost the most ground during the week. Real estate gained slightly, along with a pullback in interest rates.
Foreign stocks were mixed, with Europe, Japan, and the U.K. largely flat, while emerging markets declined across a variety of countries, notably China, which fell nearly -5%. In Europe, earnings results came in strongly, as in the U.S., although central banks appear to be on a faster pace to pull back on monetary accommodation compared to the U.S. Fed. The ECB made no change in policy at its meeting, after a tapering announcement earlier in the fall.
U.S. bonds earned positive returns as interest rates fell back from highs. Investment-grade corporates outperformed governments slightly as spreads tightened due to strong quarterly results, while high yield and bank loans were little changed. Foreign bonds in developed markets and local currency emerging markets fell back, negatively affected by a stronger U.S. dollar.
In recent years, the Fed has been known to telegraph their intentions prior to formal Fed meetings, to pre-empt financial market surprises. Remarks from Chair Powell and others lay out a framework that a November start to tapering is all but a done deal, while leaving the door open for rate increases perhaps sooner than expected—as inflation has run longer and hotter than expected. The interesting part is that while market expectations for inflation are elevated for the next few years, they fall off dramatically for future years (5-10 years out), converging back toward 2%. The Fed may not be using the term ‘transitory’ as often lately, but certainly not implying inflation is a long-term threat (likely an area of focus in their meeting this coming week). These assumptions seem to have also kept long-term interest rates under control.
Commodities fell back broadly, with some gains in agriculture (mostly corn and wheat) offset by declines in energy and especially industrial metals (largely aluminum but also copper). Experiencing less volatility than in recent weeks, the price of crude oil declined by a fraction of a percent to around $83.50/barrel.
|Period ending 10/29/2021||1 Week (%)||YTD (%)|
|BBgBarc U.S. Aggregate||0.52||-1.58|
|U.S. Treasury Yields||3 Mo.||2 Yr.||5 Yr.||10 Yr.||30 Yr.|
Sources: LSA Portfolio Analytics, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger’s, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder’s, Standard & Poor’s, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.
The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product.
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