This Week: It was a rather volatile week for many companies. A number of high-flying technology stocks fell on hard times, sending some shares down 40% or more. You wouldn’t know it from looking at the returns of the major indices. The S&P 500 and Nasdaq indexes are dominated by a handful of large companies, and they have held up well. Apple’s market value is approaching $3 Trillion, essentially drowning out the noise from the smaller companies in theses indexes.
US Treasury 10yr Yield
Source: Wall St. Journal
Crude oil had a decent week, gaining nearly 9% to $72 per barrel, but well off its highs in October where it hovered around $82. Oil traded down to nearly $10 in April 2020 when the economy was shut down due to the pandemic. The dramatic increase in oil prices is more a function of return-to-normal price ranges.
US Jobless Claims Fell to Lowest Level in Half a Century
US Inflation Hits a Multi-Decade High in November
U.S. Jobless Claims Fell to Lowest Level in Half a Century
There’s a shortage of labor. The labor participation rate is almost 2% lower than pre-Covid. Economists have coined this period as “The Great Resignation”. People are leaving the workforce. Some are retiring, while others are taking time off in hopes of recharging their batteries and finding a better paying, more fulfilling career path. We could also call this post-Covid world “The Great Mobility” as many US workers were able to move thousands of miles away from their offices where they can reduce their cost of living or seek a more balanced lifestyle. Whatever the reasoning, it is increasingly harder for employers to find good employees, and when they do, it usually costs more.
US Inflation Hits a Multi-Decade High in November
The economic headlines have been dominated by inflation numbers for several months now. Despite the high reading, it was to be expected. Bond yields actually moved lower. Why is that? It’s all about expectations. Since the 6.8% print was not a surprise, there was nothing to spook the bond markets.
The broader indexes took this all-in stride, with the large cap indices all finishing higher on the day. Consumers are flush with cash and willing to spend. Unemployment is low. Wage gains are helping. Corporate profits, so far, are growing, meaning that they can pass along price increases. How much of consumer purchases is pulling forward future demand as people rush to buy goods that may cost more later remains to be seen.
This Week: The S&P 500 closed the week at 4,544.90, and the Dow climbed to all-time highs. The S&P 500 is up 1.64% this week and 21% year-to-date. The US 10 Yr Treasury Bond yield drifted higher, settling in at 1.64%. Crude Oil continued its strength, closing at $84.18 per barrel, notching gains of nearly 2% on the week and gaining 74% year-to-date reminding us that near-term inflation is real.
Fed Chairman Jerome Powell Says Supply-Side Constraints Are Creating More Inflation Risk:
On Friday, Fed Governor Jay Powell stated that the “Supply-side constraints have gotten worse”. The Fed had previously predicted that much of these constraints to have lessened by year-end. Mr. Powell went on to add that the central bank will “need to make sure that our policy is positioned to stay flexible in the months ahead”. We are witnessing the negative effects of shutting down a global economy. Is the Fed moving away from its “inflation-is-transitory” stance? Despite these constraints, the breakeven inflation rate going out 5 years is around 2.75% vs 2.5% for the 10-year rate, both well below the current inflation run rate. Bond yields remain low and the velocity of money (which is a key gauge of inflation – higher velocity implies higher inflation) is yet to move higher, implying that long-term inflation is still not a foregone conclusion. Looking at the chart from the St Louis Federal Reserve, despite the amount of liquidity provided by the Fed, velocity remains anemic. Money has not flowed out into the real economy to support the belief that inflation is purely a monetary phenomenon. Arguments can be made about the trajectory of inflation, but what we can be certain of is that money in the future will be worth less than it is worth today.
The Chips that make the world Go Round:
Taiwan has 63% market share of the global semiconductor industry. Semiconductors are the new oil of the 21st century, a vital component in almost every product. Martijn Rasser, a senior fellow at the Center for a New American Security was quoted saying, “Whoever controls the design and production of these microchips, they will set the course for the 21st century.” Approximately 90% of the semiconductors used by US technology companies rely on Taiwanese manufacturing. This concentration is likely to issue #1 when it comes to American and Chinese relations.
There’s Money in the Banana Stand:
There is no argument that the Pandemic has widened the wealth gap. The stimulus provided by Governments around the world was necessary for many, and a boon for others. American and European households are sitting on record amounts of savings. Some of it will be used as security for future uncertainties, but much of it is just waiting to be spent. This cash hoard is likely one reason by supply constraints is an issue as there is a lot of deferred consumption.
FedEx reported earnings this week that disappointed analysts, sending shares down over 10% for the week. The earnings miss was attributable to a higher cost of labor and overall labor shortages. Packages were re-routed to distribution hubs that had sufficient labor availability. The company stated, “The current labor environment is driving inefficiencies in the operation of our network and significantly impacting our financial results”. FedEx’s President and COO also announced that shipping rates will increase 6 to 8% in January 2022 in addition to a fuel surcharge increase starting November 1, 2021.
The FOMC met this week
Fed Governor Jay Powell held his quarterly press conference Wednesday, where he delivered the Fed’s message re: the state of the economy, inflation expectations, interest rates and tapering. The economy is continuing to grow and is still coping with the effects of the global pandemic economic shutdown in 2020. Even though inflation expectations have been raised multiple times by the FOMC (now at 2.2%), the current pace of inflation is running much higher (see chart), yet the Fed is standing firm on their belief that it is still transitory. Mr. Powell stated that the Fed will begin tapering their bond purchases later in the year by $10 billion per month. At the current pace of $120 billion per month, tapering should be completed within 12 months, at which time we can expect the Fed to begin raising interest rates. Interestingly, the 5-year US inflation breakeven expectation is still below 2.5%, slightly above the FOMC’s upper range but well below the current run rate. The UST 10-year note bumped up is a week from 1.3% to roughly 1.4%, still firmly in the negative real yield zone.
August Housing Starts increased 3.9% to a 1.615 million annual rate.
The gain was entirely due to multi-family starts. Single-family starts declined 2.8% for the month. First Trust’s senior economist wrote this week that, “While it’s too early to know for sure, there are signs developers may be shifting resources away from single-family home construction and toward larger apartment buildings in response to rapidly rising rents as some people move back into big cities and the eviction moratorium ends”. First Trust’s Brian Wesbury went on to say “While the monthly pace of activity will ebb and flow as the recovery continues, we expect housing starts to remain in an upward trend. A big reason for our confidence is that builders have a huge number of permitted projects sitting in the pipeline waiting to be started. In fact, the backlog of projects that have been authorized but not yet started is currently the highest since the series began back in 1999” (emphasis added).
The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. It is not possible to invest directly in an index.*******
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