Stagflation | October 8, 2021 | FFS

Markets sold consistently across the week. Is there more red to expect in coming weeks?

Monday S&P 500 1.20% | NASDAQ 1.79%

Happy Tax Day! Retail sales expanded more than expected in March. Three major companies reported earnings, all three met expectations, all of which were financials. This was not surprising as financials usually head up earnings season. They also give us a good indication of how earnings season should go. Retail sales, however, took center stage as a strong consumer reduces the need for Federal Reserve Board (FRB) rate cuts. This caused an outsized move downward as investors anticipate less stimulus for 2024.

Tuesday S&P 500 0.21% | NASDAQ 0.12%

Housing data for March came in weaker than market expectation. Ten major companies reported earnings, with two missing expectations. Although mild, the losses continued. FRB Chair Powell indicated that inflation’s recent strength does not give the board confidence to start easing policy.

Wednesday S&P 500 0.58% | NASDAQ 1.15%

11 major companies reported earnings on the day, with three missing expectations. Focus was squarely on earnings as there was little economic data on the day. Tech stocks took a hit as AI chip orders for a specific company did not meet expectations. As would be expected this hit the tech heavy NASDAQ harder than the S&P 500.

Thursday S&P 500 0.22% | NASDAQ 0.52%

Initial unemployment claims remain benign. Existing home sales also slowed in March. 11 major companies reported earnings on the day, with one missing expectations. Markets were down for the day, but in a less dramatic fashion. Robust employment data typically is not favorable information when hoping for an FRB rate cut (as investors are).

Friday S&P 500 0.88% | NASDAQ 2.05%

Six major companies reported earnings on the day, with one missing expectations. NASDAQ led the way lower as Tech and communications got hit hardest. The best performers on the day were defensives, like utilities, healthcare, staples, and also financials.

Conclusion S&P 500 3.05% | NASDAQ 5.52%

The week was bloody. There was not a single up day for the S&P 500 or the NASDAQ Composite. The moves were not founded in fundamental data, as earnings did well. Some forward guidance shows warning of slowing revenues throughout the year, but that is normal for the last two years. Economic data, which signals the economy is doing well, has actually pushed stocks lower. The stronger the economy, the less likely the FRB is to act in reducing rates. The sell-off has extended to approximately 6%. It may take a breather in the coming days but expect that we are not done.

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Stagflation was all over the news this week. What could job data mean for future inflation?

Monday

Markets tumbled to open the week. This was driven by inflationary fears as oil prices climb. Additionally, with stimulus wearing off, 2022 should see slower growth than 2021. This ultimately leads to fears of a stagflation environment.

Tuesday

In a rare occurrence, markets bounced the day after a pull back. They regained a large chunk of the losses from the prior day. This was largely a trade on overblown stagflation expectations as services outperformed.

Wednesday

Markets opened lower as promising employment data signals the Federal Reserve Bank (FRB) is more likely to begin tapering. Late in the day a debt ceiling deal was offered by one side of the aisle which buoyed investor sentiment. The deal is short in nature but does provide an additional 1.5 months to come to a longer-term deal. This was enough to lift markets into the close.

Thursday

The S&P 500 rose 0.35% on Thursday, however, it was higher early and faded throughout the day. Initial jobless claims fell more than expected, which contributed to gains. Otherwise, it was likely a continuation of the prior days enthusiasm for a debt ceiling deal.

Friday

Markets found themselves marginally lower on Friday as the monthly jobs report failed to impress. Nonfarm payrolls rose by 194K when 366K was expected. Potentially more concerning is the 61.6% participation rate in comparison to 61.7% last month. That might not sound like much of a change, but that means there were 170,000 less people looking for work.

Conclusion

The October jobs report will be an important measure of the job markets health. This would represent the first full month after elevated unemployment benefits fall off. Look for the first Friday of November to carry significant meaning. A good job report could signal better than expected future spending, but tamer supply side inflation. A weak report could signal continued pressures on supply side inflation and low growth looking ahead.