Strong Push for the Future? | Oct. 29, 2021

The week was all about inflation data, but have we inflated its importance?

Monday S&P 500 0.04% | NASDAQ 0.03%

Markets were little changed on the day. There was very little economic news out before the bell on Monday. The week will likely be sharply focused on Wednesday when we get the updated figures for March inflation. The report is expected to show an increase from February.

Tuesday S&P 500 0.14% | NASDAQ 0.32%

Small business sentiment slipped in March to the lowest level since January 2013! Even still, markets advanced ahead of inflation data on Wednesday. Growth stocks out-performed which signals that an increase of inflation data would likely not hamper growth stock leadership. This is important because the rate cuts expected later this year would favor growth stocks most.

Wednesday S&P 500 0.95% | NASDAQ 0.84%

Consumer Price Index (CPI) information showed that inflation has stopped cooling. A 0.1% reading was replaced with a 0.4% reading. The main culprits were transportation services, energy, and home services. The markets moved sharply lower, but likely on the Federal Reserve Board (FRB) minutes release, rather than on CPI data. FRB Minutes showed concerns that inflation was stagnating, endangering the likelihood of the FRB cutting rates later this year.

Thursday S&P 500 0.74% | NASDAQ 1.68%

Producer Price Index (PPI), which is a proxy for wholesale inflation rose less than expected. Initial jobless claims fell on the day supporting a strong job market. The weaker than expected inflation data led to a bounce back rally by markets. Little was changed about rate cut expectations moving forward however, given the FRB minutes from March.

Friday S&P 500 1.46% | NASDAQ 1.62%

Michigan Consumer Sentiment is projected to slip, but remains in the high 70’s. Financial firms got earnings season underway on Friday and they did not impress. The slide on Friday solidified a down week for equities. The Nasdaq led markets lower on the day, but its Thursday rebound mitigated losses for the week.

Conclusion S&P 500 1.56% | NASDAQ 0.45%

The week ended well into the red. The fall represented the worst week for the S&P 500 since January. In January the focus was on the markets accepting that the FRB may only cut rates three times this year. This time it is on the realization that perhaps the FRB may not cut rates at all. As of now investor expectations are that the FRB will cut rates one, maybe two times (September and December). The meeting in two weeks should provide more clarity. Even with this change to rate cut expectations, it will be interesting to see what action the FRB takes with Quantitative Tightening. If they do start to slow the selling bonds that should provide some relief.

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Earnings were strong across the week, which pushed markets higher. Will it hold up for future quarters?

Monday

The S&P 500 rose .50% to open the week. This was a great opening figure. As of late, markets have opened the week with a blah performance. It has either been down or only up slightly. VIX is currently 16 and this would represent the upper ended of the daily range for the S&P 500.

Tuesday

The S&P 500 rose 0.20% on Tuesday. The housing market provided some explosive data as new home sales surged by 14%. Additionally, the Home Price Index, which measures change in average home prices rose 18.5% YoY (Oct). Believe it or not, this measure is a slow down from last month’s 19.2%.

Wednesday

Markets shifted lower for the first time in a while on Wednesday. The S&P 500 lost 0.50%. Corporate earnings contributed to the move lower for the first time. Earnings from large cap Tech stocks, out Tuesday evening, pushed market sentiment lower at the open. Compounding the sentiment was a larger than expected draw down of oil supplies. This lends to concerns around continued price pressures, AKA inflation concerns.

Thursday

The markets rebounded nicely on Thursday, as the S&P 500 rose 0.98%. Initial jobless claims fell to the lowest level since the start of the pandemic (281K). A trend that is happening more and more as of late. For perspective, average initial job losses at the end of the last expansion were around 200K to 220K per week.

Friday

Markets closed the day and the week on an up tone. The S&P 500 rose 0.20% to end the day and a weekly gain of 1.14%. This happened even as consumer sentiment came in at 71.7. The brighter news of the day was higher than expected consumer spending. Additionally, Personal Consumption Expenditures (PCE) came in at 4.4% YoY in September. While the highest level to date, it is still substantially lower than its CPI counterpart at 5.4%. The Federal Reserve Board (FRB) regards the PCE measure as a more accurate indication of inflation.

Conclusion

Markets celebrated another strong week for corporate earnings, even as GDP slides to 2.0% in Q3 from 6.7% in Q2. 55% of S&P 500 companies have now reported and 82% are beating on earnings and 66% have beat on revenue. Cost cutting initiatives should be expected over the next year as companies attempt to absorb higher input costs. Unfortunately, expect coming quarters earnings beats to fall as interest rates creep higher and inflation deteriorates bottom line performance.