12|07|2021

The Charge Lower | December 3, 2021

AUTHOR: Jason J. Roque, MS, CFP®, APMA®, AWMA®
TITLE:       Investment Adviser Rep – CCO
TAGS:   S&P 500, FRB, CPI, Rates, Sentiment

Headlines included Omicron, Jobs, Manufacturing, and Services PMI. So, what led the charge lower and why?

Monday

The S&P 500 jumped to open the week, rising 1.32%. This was a bounce day after a strong move lower the previous Friday. The bounce is not surprising as the move lower was based on information not formerly available (Omicron). Light market trade on Friday from the holiday on Thursday exasperated the situation.

Tuesday

Selling pressures resumed on Tuesday as all the gains from Monday were reversed and then some. The S&P 500 fell 1.90% on the day. Federal Reserve Board (FRB) Chair Powell indicated that inflation was proving more resilient than anticipated while testifying on Capitol Hill. This gave markets moment for pause. This is an indication that we will likely see rate hikes (monetary tightening) quicker than anticipated.

Wednesday

Wednesday started strong as investors responded favorably to ISM Manufacturing data. That momentum quickly faded, however, as the first case of Omicron was detected in the US. The S&P 500 gave back another 1.18%.

Thursday

Another bounce came on Thursday as the markets faded Omicron concerns. Initial jobless claims continued their run at lower levels as only 222K initial claims were filed. The S&P 500 rose 1.42%.

Friday

Happy Jobs Friday! It was a mixed report. Private nonfarm employment was a hard miss, coming in at 235K when 530K were expected. The rate of unemployment fell, however to 4.2%, even as participation rose to 61.8%. Largely overlooked was the fact that ISM Services PMI rose to 69.1 for November. Services make up over 80% of our economic activity, this data carries strong meaning. For perspective, this is the highest reading dating back to the start of tracking in 1997. The pandemic low (April) was 41.8!

Conclusion

Interestingly, the jobs data released on Friday seemed bleak as a result of seasonal adjustments. In all actuality, 778K jobs were added, but, that is adjusted down in comparison to last year’s figures. Aside from a miss on wage growth (which actually signals less inflationary pressure), the jobs report was quite favorable:

  • 778K jobs added
  • 4.2% unemployment rate, a decrease
  • 61.8% participation, an increase
  • 7.8% Underemployment rate, a decrease
  • 4.8% YoY Earnings increase, equal

So why the fall on markets? The FRB has a dual mandate, inflation of approximately 2% and full employment. Full employment has historically been deemed to occur at around 4%, however inflation is running hot at 5% (PCE). Investors see the job market as stable enough that the FRB will be turning their attention to inflation. This happens by the FRB taking away accommodative policies such as bond buying programs. It then moves to them tightening monetary policy by raising interest rates and selling bonds on their balance sheets. All of which signals contained economic growth expectations in the near term.

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