The stock market hit new all-time highs again last week, as Q3 earnings season continues to demonstrate solid corporate earnings performance. We also got the first estimate for Q3 2021 GDP and September Disposable Income, Consumer Expenditures and the PCE Price Index, the Fed’s preferred measure of inflation. What do they tell us about the economic outlook from here? Catch all the details below for this week’s Monday market update or listen on this week’s episode of Finance Explained.
Last Week in the Market
Last week the stock market hit new highs again as Q3 earnings surprises – companies reporting earnings ABOVE analysts’ expectations – continued to fuel market gains. The market jumped on Thursday after Hertz announced a deal with Tesla to buy 100,000 cars… pushing the Consumer Discretionary sector of the index up +4.4% for the week.
On Friday, the S&P 500 closed at an all-time high, to end the week up +1.3%, and the month of October up +6.9%, following September’s sell-off. The market is now up +22.6% year-to-date.
The yield on 10-year Treasury bonds cooled a bit last week. After rates rose across the board for most of October, last week we say long-term rates soften while short-term rates continued to rise. This is likely due to two things 1) near-term inflation concerns mixed with 2) longer-term economic outlook concerns, as supply chain issues continue to not only push prices up, but impact economic growth as well.
We can see investors’ inflation expectations most clearly in the spread between 10-year Treasury and TIPS, or Treasury Inflation Protection Securities. The spread in rates between the two reflects investors’ expectations for inflation over the next 10 years. Historically, it has hovered at or below 2%, in-line with the Fed’s long-term inflation target. It hit the highest level since 2006 two weeks ago, before cooling a bit this week, ending the week with a spread of +2.52%.
In general many of the market trends we’ve seen all year, continue. Commodities, driven by inflationary pressures, continue to dramatically outperform, up +45% year to date. Higher risk, higher multiple stocks, like growth, small cap and the tech-heavy Nasdaq continue to exhibit more volatility and underperformance in the face of a rising interest rate environment, while value stocks and real estate outperform. However, last week’s Tesla news and Q3 earnings have fueled some outperformance by Growth stocks again.
For the month of October, the S&P 500 ended the month up +6.9%, while the Nasdaq was up +7.9%, the Large Cap Value Index is up 5.1% and Vanguard Real Estate Index is up +7.1%.
While we continue to wait on the final details on the budget reconciliation negotiations from Congress, last week we got an overall economic update with…
Q3 Earnings Season
The biggest driver of the stock market these last few weeks is definitely the strong Q3 earnings season. So far, 56% of S&P 500 companies have reported Q3 earnings. Of those, 82% have beat analyst earnings expectations so far. The record? 87% just last quarter, in Q2 2021.
On average, companies reporting have beat earnings estimates by more than 10%, with the biggest earnings surprises happening in the financial sector due to non-recurring reserves for losses being released and higher trading revenues.
Going forward, analysts expect revenues growth to outpace earnings growth in 2022, and have less growth than this year. This is likely due to inflationary pressures and companies’ ability to pass on higher costs in the form of price increases, as well as competition for consumer dollars as student loan forbearance ends. The stock market trades based on company earnings and earnings growth: if inflation erodes earnings growth expectations, we could see increased volatility in the stock market as we head into 2022.
All of the Q3 earnings data is based on the 56% of S&P 500 companies who reported through the end of last week. Another 167 more companies will report this week. Stay tuned!
Weekly Jobless Claims for 10/23/2021: 281,000 new claims
Weekly jobless claims fell continue to fall to new post-pandemic lows.
For the week ended October 23rd, new initial jobless claims were 281,000. Continued claims for the week ended October 16th declined as well, to 2.2 million, a 1.7% insured unemployed rate, down 0.1% from the week prior.
Next Data Point?
Weekly jobless claims are released by the Dept. of Labor every Thursday
Q3 2021 GDP, First Estimate: +2.0% YOY, missing expectations
Last Thursday, the Bureau of Economic Analysis released the first estimate for Q3 2021 GDP. Economists expected annualized real GDP growth (adjusted both for seasonality and the impact of inflation) of +2.8%, but just +2.0% growth was reported for the quarter. The miss is even worse if you consider that at the outset of Q3, back in early summer, expectations were as high as +8%!
What happened? Economists underestimated the impact of both the Delta variant surge and ongoing supply chain bottlenecks. This significantly impacted personal consumption expenditures on durable goods, down -26.2% for the quarter on an annualized bases. Other drags on GDP growth? Reduced federal spending, as many of the emergency measures enacted during the pandemic, have begun to phase out, and rising net imports.
The US continues to be a net importer of goods. This means we buy more goods from foreign countries than they buy from us, which has a net negative impact on GDP. We use our dollars to buy goods produced in other countries, boosting their GDP, at the expense of our own economic production. Our import spending is growing faster (+6.1% for Q3) than our exports (which actually declined -2.5% for the quarter), creating a headwind for US GDP.
Big picture – GDP is the overall measure of economic productivity and the unofficial measure used for determining economic cycles. According to GDP, we have more than recovered from the 2020 recession and are firmly in the expansion phase of the economic cycle.
Next Data Point?
Second Estimate for Q3 2021 GDP will be released November 24, 2021
September 2021 Personal Income, Outlays & PCE Price Index
On Friday, the Bureau of Economic Analysis released the Personal Income and Outlays report for September 2021. This report is important for a number of economic data points it reveals each month.
First, disposable income. How much in the aggregate are Americans earning each month? For the month of September, disposable personal income was down -1.3% vs. the month prior. This decline in income is entirely attributable to a decline in government social benefits payments, largely due to the end of Federal unemployment benefits, which ended the week of 9/4.
Notice the pre-pandemic trendline for disposable income. Note how there was only a brief dip below the trendline at the very start of the pandemic. And then note how a massive increase in government payments boosted incomes beyond the long-term trend line for most of the last 2 years.
Disposable income matters because it is what gives consumers the ability to spend… and that matters because consumer spending represents two-thirds of US GDP. Making sure consumers have reliable income and feel good about the outlook for the economy is important to driving consumer spending. During much of 2000, despite government payments boosting incomes, consumer spending remained down.
Why? Because most of our spending is now services which require in-person interactions that many were not comfortable with due to the pandemic. Travel, restaurants, hospitality and recreational activities suffered most.
However, over the last 6 months, as vaccinations have become more widely adopted, consumer spending returned. And it continued to grow in September, +0.6% vs. August, even as incomes fell. This resulted in a big drop in savings rates – to 7.5%, in-line with pre-pandemic levels. The question now is how long will the increased savings of the last 2 years fuel consumer spending going forward, if income doesn’t grow without government support?
Another data point included in this monthly report is the PCE Price Index, the Federal Reserve’s preferred measure of inflation. This measures the price increases based on actual personal consumption expenditures – so what people are actually buying.
For September, the PCE Price Index was up +4.4% over the last year, with prices on goods up 6.1%, services up 3.5%, food up +4.1%, and energy up +24.9%. The Core PCE Price Index, which excludes more volatile food and energy prices, was up +3.6%. Supply chain bottlenecks and energy prices continue to drive inflation, especially for durable goods, which saw significant increase in demand over the last 2 years, as people cut spending on services and spent more on goods instead.
Inflation hasn’t seen annual increases this high since the early 1990s. If we go back to disposable income and that pre-pandemic trendline? The Federal government likely overdid it a bit, and fueled some of these inflationary pressures. While the government should step in and serve as a social safety net in a recession, they more than made people whole – they boosted incomes far beyond normal.
At the same time, the pandemic paused production and/or limited production capacity on a whole host of goods and raw materials. It created the perfect inflationary storm – too many dollars chasing reduced supply.
So when will inflation subside to more normal 2% levels? When consumer demand and supply chains stabilize. Supply chain bottlenecks should alleviate with time, though likely not for another 6-12 months, at least. Consumer demand could slow sooner – as student loan forbearance comes to an end, if Fed starts to raise interest rates, if pricing pressure continues – all of which will also come to a head over the next 6-12 months.
Next Data Point?
October Personal Income & Outlays will be released November 24, 2021
The steady decline in cases we have seen over the last 2 months, reversed trend last week with cases beginning to increase again nationwide. However, cases are still down more than 50% since the peak of the Delta surge in early August.
Vaccinations also continue to increase, albeit more slowly than last spring, as do boosters. Currently, over 78% of those over the age of 12 (the eligible population) have received at least 1 dose. I should also note the CDC is now also tracking and reporting booster shots, though not everyone is currently eligible for boosters.
The biggest news in the last week? Both the FDA and CDC have now granted Emergency Use Authorization of a lower dose of the Pfizer vaccine for children ages 5-11. Vaccines should be available nationwide for all those 5 and over as of today.
Next Data Point?
CDC tracks and reports pandemic data daily via the CDC Covid Data Tracker
This week in the markets, we will continue to watch the progress in Congress on the Senate’s budget reconciliation, the $3.5 trillion spending bill, which as of last week, the price tag seems to now have been cut to $1.85 trillion.
On the economic front, it’s a big week for labor market data and earnings season…
- Wednesday – ADP Employment Data & FOMC Statement
- Thursday – Weekly Jobless Claims
- Friday – October Employment Situation
In addition to those, Q3 earnings season continues, with over 167 companies reporting.
Questions about this week’s update or recent financial headlines? Tune in to Live Q&A with Family Finance Mom every Monday and Wednesday at 9AM ET on Instagram. Look for the question box in stories to leave your questions, or watch and ask them live.