Markets Notch Records With Inflation at 30-year High

Delta, inflation, supply chain struggles, the Fed and fiscal policy drama all gave markets plenty to chew on over the past few months, but ultimately the proof is in the profits. Despite several fears hanging over investors, all three indexes rather quietly closed trading at record highs Friday. That’s because Q3 corporate earnings quieted the noise and bolstered investor confidence going into the final months of 2021. Despite well-publicized supply chain logjams and rising prices, corporate profits remained resilient. Growth has exceeded expectations, and the companies that power the economy are proving more resilient than expected. Of course, plenty of credit goes to the consumer as well.

Meanwhile, President Joe Biden also announced Thursday that Democrats had made progress on their social spending bill after cutting the proposal’s scope and price tag — from $3 trillion to $1.75 trillion. Markets received the news well, as a scaled-down package may have allayed some fears about taxes and fiscal spending and could make passage of an infrastructure bill more likely. The House could vote on both plans as soon as Tuesday, but all of this may not come to a close until late November, at which time a renewed debt ceiling debate will again come into focus. Of course, inflation is still elevated, COVID-19 isn’t behind us, and new concerns are bound to emerge. But sometimes it’s easy to underestimate the true grit of the American economy when uncertainty sinks in.

Overall, the past few weeks served to underline a key component of long-term success in markets: Discipline and patience are imperative to building wealth. Narratives come and go, traders fret the small stuff, and market spectators are all too eager to amplify fears. A well-diversified investment portfolio that’s part of an individually tailored financial plan is, in our view, the best road to reaching your goals.

Wall Street wrap

Earnings Continue to Impress: Another batch of earnings helped Wall Street look past headline inflation last week and push the S&P 500 into record territory. Microsoft and Alphabet both topped consensus projections. Earnings from Amazon and Apple missed analyst expectations, although they weren’t anything to sniff at — revenues still grew 15 percent and 28 percent, respectively. If anything, it’s a sign of breadth that markets broadly could shoulder a pullback in two of the biggest companies on the planet. A total of 279 companies in the S&P 500 have reported earnings thus far, and 82 percent have beaten earnings estimates, with profits on pace to rise 38.9 percent year over year. That tells us that growth is more broad based rather than isolated to a few mega-caps, as it was during the turbulence of 2020. These solid reports are also coming amid the delta variant and supply chain constraints, indicative of corporate and consumer resilience in the face of sizable challenges.

Consumer Confidence Rebounds in October: After three straight months of declines, consumer confidence rebounded in October, rising to 113.8 from 109.8 in September. COVID-19 cases are on the retreat, and people are feeling good about labor market prospects. Those factors helped to overshadow short-term inflation expectations, which rose to a 13-year high, according to data from the Conference Board’s monthly survey. Further, despite rising prices, the proportion of consumers planning to purchase a car, home or major appliance all increased in October.

While surveys that gauge consumer perceptions about the economy don’t always translate to actual behaviors, it’s certainly a positive sign to see optimism improve as we head into the final months of the year — particularly as holiday ads and Black Friday sales kick off (yes, we’re only a day removed from Halloween).

Inflation Pinned at Near 30-Year High: Annual inflation rose in September at its fastest pace since 1991, notching a 4.4 percent increase from this time last year. Month over month, prices rose 0.3 percent, which was in line with expectations. Stripping out food and energy costs (to get the gauge known as core PCE), inflation rose 3.6 percent year over year — also the highest since 1991. Core PCE, we remind, is the Fed’s preferred inflationary gauge, and the Fed wants inflation to average around 2 percent over the long term but recall that Fed Chairman Jerome Powell tweaked the central bank’s policy and will allow inflation to run higher than 2 percent for “some time” to essentially make up ground following a sustained period of negligible inflation.

Going deeper, energy costs rose 24.9 percent, while services rose 6.4 percent. Treasury Secretary Janet Yellen on Friday said she believes inflation will fall back closer to 2 percent in 2022. We also remain constructive on inflation; we believe many of the underlying factors will be sorted and the economy will retain enough slack to improve productivity and place a lid on prices.

Q3 GDP Decelerates: The U.S. economy grew at a seasonally adjusted annual rate of 2 percent in Q3, the slowest pace since the pandemic-driven contraction in Q1 2020. All the prime suspects we’ve discussed for the past few months are to blame. Supply chain issues, labor shortages and COVID-19 all impacted spending and growth. A decline in Federal government spending and a widening trade gap also contributed to slower growth. However, GDP is a backward-looking metric. To look forward, we prefer the Conference Board’s Leading Economic Index, which compiles a host of data points (including GDP) to give us a sense of where the economy is headed. The latest read from the index’s 6-month, annualized leading indicator is up 11.1 percent. In other words, weakness may be behind us, and better times are ahead.

THE WEEK AHEAD

What to Watch For: Earnings will continue to roll out through the week, though the slate will be significantly lighter by market cap. Notable companies reporting this week include Clorox, Progressive, Airbnb and Monster Beverage. Here’s how the week ahead is looking:

• Monday: The ISM Manufacturing index for October will be released, and we’ll be looking for clues about prices, labor costs, backlogs and orders.
• Wednesday: The ISM Services index for October will be released, and it’ll be interesting to see how the lay of the land improved given the decline in delta cases we observed through the month. The services sector is more sensitive to COVID-19 impacts, so we should see some improvement in the numbers there. We’ll also get core capital goods and durable goods orders, which are proxies for business investments. Lastly, Fed Chair Powell will hold a press conference.
• Friday: October payrolls and unemployment will be released, and we’re expecting to see some improvement, as a decent number of workers came off the sidelines during the month.  

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