The market melted up again this week as all eyes were on Wednesday’s Federal Reserve meeting. According to Bloomberg, and as expected, Fed policy makers announced a stimulus-reducing taper of monthly bond purchases. The taper will begin later in November and continue for many months into the future with the caveat that they’ll adjust the taper as needed if economic conditions warrant it. He further expressed a unanimous decision by Fed participants to be in no hurry to raise interest rates even though inflation may run hot for next few months, with no guidance on future rate hike plans. The Fed did acknowledge that inflation is elevated, but in their opinion, some inflation is due to factors that are expected to be transitory and once supply chain constraints ease, inflation is expected to reduce. All this is a signal from the Fed to investors that they think the economy is strong enough to handle the taper and the economy is on a good track.
Fed Chair Powell reinforced this interest-rate view in his post Fed meeting press conference Wednesday, saying that “it's not yet time to focus on rate hikes since maximum employment might not be reached until mid-2022”. We would say full employment may not be reached until well after that, we’ll see!
News has been favorable for stocks. The Institute for Supply Management’s U.S. manufacturing index rose to 61.1% in September from 59.9% in the prior month, indicating that manufacturing is continuing to grow. According to Refinitiv: 60% of S&P 500 companies have reported earning thus far with 80% of those companies reporting exceeding guidance from last quarter. Further, corporate profits are on pace to increase 39%, which may surprise many reading this. Growing earnings and profits (dividends) are why we invest in good companies, this is the point of investing, to grow our money. Notably this earnings performance is happening concurrent with Covid supply constraints and labor shortages abound. Companies and the stock market are getting on with it, and many economist agree these two issues will abate as 2022 proceeds, but certainly these issues have impacted economic growth lately. Over the weekend a deal was reached between the U.S. and EU to ease U.S. tariffs on steel and aluminum imports with a goal of reducing aforementioned supply chain bottlenecks and carbon emissions.
The market has hit new highs, again, and has now reached its most overbought reading in more than a year (September 2020). While overbought sounds bad, it is good to see lots of participation by investors. Undoubtably the market can continue moving higher from here.
A piece from First Trust talking about the Fed, and inflation and interest rates
Also attached is Michael Gibb’s piece from Monday this week and it has a very interesting chart on page 3 showcasing average monthly performance for the S&P 500. Notably, October is typically the 5th best ranked month for performance, but was up 6.91% this year, which is way better than the 1.58% average for the month. November is typically the 2nd best month and December is 3rd best. Buckle up!
Have a nice weekend!
DeHaven, Michael, Janet, Mariah and Tamara.