With the elevated inflation numbers reported Wednesday, the market wobbled a bit this week. You can tell the market is digesting a lot when both the S&P 500 and NASDAQ are trading up while the DOW and Utilities sector are trading down all on the same day. Monday’s action marked the 8th straight day of higher closing prices for the market and also showed 17 of the last 19 days being up days. Then the market promptly sold off Tuesday and Wednesday and was level on Thursday to consolidate the recent run up. Overall the market has gained ~8% in the last 20 trading days with only two ~1% pullbacks. As mentioned last week, the market had reached overbought status, and the couple day pullback this week is a normal response to being overbought.
The obvious news of the week was the reported increase in inflation, both the monthly number and the annualized number went up more than expected. The annualized consumer price index, which is a basket of products ranging from gasoline and health care to groceries and rents, rose 6.2% (vs 5.9% expected) from 12 months ago. This is the highest annualized increase reported since December 1990 and certainly is attention grabbing. For the monthly October reading, inflation increased 0.9% vs the 0.6% estimate. There is no question we’ve all noticed increased prices at the pump and grocery stores and elsewhere. When you’re seeing the effects of inflation in your daily life, it’s a similar emotion to when the market drops, where it can feel like it will never end. This is a normal emotion to experience. In time it will abate, hang in there, the sky is not falling. Your portfolio is designed to withstand this.
We did get a small voice of positivity on inflation this week. On Tuesday Treasury Secretary Yellen reiterated that, in her opinion, “this elevated inflation won’t persist beyond next year”. This says to us, expect some elevated inflation carrying over into the beginning next year… at least. As usual, we’ll see, but at this point predicting inflation 12 months from now is really, really hard.
It's not all bad or scary news right now. According to the U.S. Department of labor, the October jobs report came in better than expected. Nonfarm payrolls added 531,000 jobs and the unemployment rate fell to 4.6%. The best jobs number since the Pandemic arrived. Further progress on global re-openings was reported, as the travel ban for fully vaccinated travelers into the US was relaxed which could act as a positive tailwind economically in 2022 as tourism increases. Other reports out of Washington explain that, though the infrastructure bill passed in the House of Representatives last week, there may be a delay on whether to vote on the $1.75 trillion budget reconciliation bill in the Senate until next year. The delay would be due to higher inflation, and also so Congress can focus on the debt ceiling issue.
Back to the markets: According to Michael Gibbs’ comments from Thursday: In the very short term, he’s watching for the first level of downside support to be at the 21 Day Moving Average on the S&P 500 (that level is at 4590 or about 1% lower). The next area of upside resistance would be around 4795. The S&P at the time of this writing is hovering around 4670.
As a friendly reminder, and as reported last week, the Fed will commence the tapering of bond purchases later this month. The Fed further clearly communicated that they will leave interests rates untouched, at nearly 0%, well into 2022. Remember, the bond purchase taper is a slow reduction of the stimulus pumped into our economy, this reduction is a good thing. It’ll be nice and slow, with no surprises, and likely we will not experience a Taper Tantrum 2.0. Stocks reacted positively to both the taper and no interest rate change news, with the understanding and perception that the economy is again climbing the wall of worry from the pandemic bottom. The need for stimulus will continue to diminish as we work through supply bottlenecks, qualified labor, inflation and Washington gridlock.
Have a nice weekend!
Sincerely, DeHaven, Michael, Janet, Mariah and Tamara.