Weekly Market Update Highlights
• The Fed remained consistently dovish in its messaging on tapering and rate hikes. Guidance, however, left the door open for rate lift-off in late 2022 (or possibly sooner).
• Payroll gains in October and upward adjustments for prior months are likely the beginning of a long-awaited trend. We are keeping an eye on wage inflation and labor force participation rates.
• Overall, dovish central banks, fading chances for corporate tax increases and economic data pointing to a reaccelerating growth should allow equities to appreciate into year-end.
Central banks around the world largely reinforced a slower transition away from historically accommodative policies, which supported global equity markets last week. The S&P 500 gained 2.0%, locking in its fifth consecutive weekly gain. The tech-heavy NASDAQ and DJIA added 3.1% and 1.4%, respectively. Outside the U.S., the MSCI EAFE and ACWI ex USA indexes each gained over 1%, while the MSCI EM Index was mostly flat, weighed down once again by losses in Chinese equities.
Market Drivers And Risks
• The Fed largely met expectations in announcing a winding down of asset purchases ($15 billion per month in November and December) and restating its intention to leave rates unchanged until early 2023.
• Although Chair Jerome Powell’s dovish tone supported equity markets on Wednesday, investors remain highly skeptical of the central bank’s ability to avoid a premature rate lift-off in the face of reaccelerating economic growth and inflation that is appearing more than transient. A late-week rally in Treasury markets led to a further flattening of the yield curve – a sign that investors fear growth may be derailed by rates moving too high, too soon.
• Headline labor market improvements were “just right,” as the U.S. added 531k jobs, over 100k more than expected. However, a drearier story lies beneath the 4.6% unemployment rate, as labor force participation remains stubbornly low.
• With the expiration of enhanced unemployment benefits for roughly 9 million Americans and job openings totaling more than 10 million, we expect participation rates and job growth to increase from here. How quickly they improve remains to be seen. A moderate pace would be ideal for equity markets, as it would allow the Fed to “stay the course.” However, rapidly accelerating job growth could indicate an overheating economy, forcing the Fed to act. A sluggish rate might lead to wage inflation, which could drag on future earnings growth.
• The landscape is shifting for pandemic “winners” and “losers,” as the overhang of the Delta variant dissipates and confidence builds for an end to the pandemic.
• The “winners” of the prevailing at-home environment (e.g., producers of workout equipment and personal electronics) that began in 2020 continued to benefit from historically healthy consumer profiles and robust demand in 2021. That said, consumer preferences have rapidly shifted from goods to services as the effects of government stimulus and Covid-19 abate. Going forward, while the “losers” should benefit from rebounding trends and relatively easier historical comparisons, we will be more selective by identifying companies that (a) chose to prudently reinvest pandemic-driven gains and (b) have sustainable business models capable of structural growth beyond the pandemic era.
Economic Week In Review
• A pullback in the 10-year U.S. Treasury yield lead to relative outperformance for growth and technology stocks. Consumer discretionary (+5.0%) and information technology (+3.4%) added the most, aided by gains in autos and semiconductors. Financials and health care each fell 0.6%. From a style perspective, the Russell 1000 Growth outperformed its value counterpart by 1.0%. Small cap stocks handily beat large caps, fueled by hopes for an end to the pandemic in the U.S. and reaccelerating growth.
• The S&P 500 wrapped its fifth consecutive weekly gain thanks to strong earnings reports, accommodative policy and favorable economic data. Additionally, fading concerns of sharp corporate or individual tax rate increases, and glimmers of hope for easing global supply chain disruptions, allowed U.S. broad-based indexes to reach record highs.
Risks To Our Outlook
The Fed will be under intense scrutiny as it tiptoes toward contractionary policies. With markets so accustomed to quantitative easing and low rates, volatility is likely to rise as investors grow leery of a possible misstep in timing or magnitude.