Monday Market Update 11-8-2021

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The stock market hit new all-time highs again last week, as Q3 earnings season continues to demonstrate solid corporate earnings performance, with countless positive earnings surprises. We also got jobs numbers for October, an update from the Fed, and Congress finally passed a bill – the $1 trillion infrastructure bill. What do they all 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.

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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. Through Friday, 89% of S&P 500 companies had reported for the third quarter, with more than 80% beating earnings expectations.

On Friday, the S&P 500 closed at an all-time high, to end the week (and November month to date) up +2.0% The market is now up +25.1% year-to-date.

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The yield on 10-year Treasury bonds rose the first half of the week leading up to the Fed’s statement following its regularly scheduled FOMC meeting. The Fed announced, as expected, that it would begin asset purchase tapering this month, reducing the securities it is buying on the open market from $120 billion month to $105 billion in November and $90 billion in December.

They expect to continue to reduce purchases through the first half of 2022, down to zero by June, so long as the economic recovery continues. This means they are still growing and adding to their balance sheet, just at a slower pace. The Fed also emphasized that asset purchase tapering in no way means interest rate increases will follow. The Fed’s next regularly scheduled FOMC meeting statement is December 15, 2021.

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While market interest rates may have fallen in the second half of the week, investors’ inflation expectations remain. These can be seen 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 in October, and remains elevated, ending the week with a spread of +2.54%.

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Last week, some of the softening in interest rates led to a week of outperformance by more volatile stocks, as the Nasdaq100 was up +3.2% and Small Cap stocks were up over +6% vs. the broader S&P 500 up just +2.0%. For 2021 year-to-date, the S&P 500 is up 25%, and after last week’s surge, the Nasdaq100 is now up +26.9% for the year, while Real Estate remains the outperformed, up +32% year-to-date.

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While we still continue to wait on the final details on the budget reconciliation negotiations from Congress, last week the House did pass the $1 trillion infrastructure bill. We also got an employment market update…

• Friday – Employment Situation for October

We also got the usual Thursday Weekly Jobless Claims data, for the week ended October 23, 2021. More on all these stories below or get the full update on this week’s episode of Finance Explained.

Q3 Earnings Season Update: 89% of S&P 500 reported, 81% Beat Estimates

The biggest driver of the stock market these last few weeks is definitely the strong Q3 earnings season. So far, 89% of S&P 500 companies have reported Q3 earnings. Of those, 81% 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, and energy sector, due to massive increases in energy prices.

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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 89% of S&P 500 companies who reported through the end of last week, indicating Q3 earnings season has largely reached its end. Q4 earnings season begins in late January, early February 2022.

October Employment Situation: +531,000 jobs, 4.6% unemployment

Last Friday, we finally got the employment numbers economists had been expecting. There were 531,000 jobs added, and the unemployment rate dropped 0.2% to 4.6%. Despite these gains, we still remain 4.2 million jobs short of pre-pandemic employment levels.

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How can we be 4.2 million jobs short of 2019 employment levels but have just 4.6% unemployment? The labor force – people willing to work and looking for jobs – has declined too. In fact, the labor is 3.1 million people less today, than pre-pandemic. And if people opt out of the labor force, they are not counted as unemployed.

In recent decades, the labor force has been declining due to the demographics of our population, as more people enter retirement than new workers entering the labor force. Over the last 18 months, many people near retirement age, opted to retire early, accelerating that trend. You can see this in the declines in the employed persons by age. The number of employed persons over the age of 45 declined more than all other groups since the start of the pandemic.

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We’ve also seen far more women leave the workforce, representing nearly 58% of the labor force decline. Some good news in October, however, is we saw 180,000 women return to the labor force, hopefully indicating some of the frictions, like access to childcare and virus concerns, may be alleviating.

Just as there are gender differences in the employment data, there are also other demographic differences as well. In general, unemployment remains higher among young men (5.0% unemployment for men aged 25-34 vs. 4.5% for women). It is also higher the less education you have, with the college-educated having an unemployment rate of just 2.4% vs. 7.4% for those without a high school diploma.

Racially, unemployment is highest for Black men (8.3% vs. headline 4.6% rate and 3.6% for white men).

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One other positive trend in the October Employment numbers was the decline in long-term unemployment, as well as the increase in re-entrants to the unemployed. Long-term unemployment, those without a job for more than 6 months, are most likely to leave the labor force and see long-term income impacts from loss of experience. That continues to sharply decline. We also see nearly 1/3 of those unemployed indicated the reason as being re-entrants to the labor force, which is a good sign for the labor market going forward, as the current issue remains not job openings, but people willing to work.

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Finally, given the supply-demand imbalance in the labor force – with employers struggling to find applicants to hire, wages continue to rise. Over the last year, weekly earnings are up 5.4% for non-supervisory employees.

Next Data Point?
November Employment Situation will be released on the first Friday of December (12/3/2021)

Weekly Jobless Claims for 10/30/2021: 269,000 new claims

Weekly jobless claims continue to fall to new post-pandemic lows.

For the week ended October 30th, new initial jobless claims were 269,000. Continued claims for the week ended October 23rd declined as well, to 2.1 million, a 1.6% insured unemployed rate, down 0.1% from the week prior.

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Next Data Point?
Weekly jobless claims are released by the Dept. of Labor every Thursday

Pandemic Update

The steady decline in cases we have seen over the last 2 months, seems to have stalled in recent weeks. However, cases are still down more than 50% since the peak of the Delta surge in early August, and holding steady at around 70-72,000 new cases weekly.

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.

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Vaccines are also now available nationwide for children age 5-11. Early reports indicate less than 1 million children received vaccines in the first week of availability, or just 3% of the age group. This is a slower uptake than with older age groups, as many parents remain hesitant or plan to not vaccinate their children at all. A poll by the Kaiser Family Foundation found only 27% of parents were eager to vaccinate their 5-11 year olds, while 33% plan to wait, 5% will only do it if mandated, and 30% are opposed to it completely.

Next Data Point?
CDC tracks and reports pandemic data daily via the CDC Covid Data Tracker

Political Update

Last week, the House passed the bi-partisan $1 trillion Infrastructure bill. It will be signed by the President in a ceremony next Monday. The House had been sitting on the bill since it was passed b the Senate in August, as they wanted a vote on the multi-trillion social spending bill first, but finally took action last week. The bill passed the House with a vote of 228-206, with 13 Republicans joining most Democrats to support the legislation. Six progressive Democrats voted against it.

The bill is a slimmed-down version of the original $2.3 trillion American Jobs Plan initially outlined by the White House, with focus on true, traditional infrastructure spending. Roughly half of the bill is dedicated to transportation infrastructure (roads, rail, airports), with the other half going towards broadband, power, clean drinking water, protection against cyberattacks, and other initiatives.

The bill represents a $550 billion increase in spending relative to infrastructure spend that was already planned, most of which is being funded by $200 billion on pandemic relief funding that has yet to be spent.

The Congressional Budget Office (CBO) estimates the bill will increase deficit spending by over $250 billion over the next 10 years.

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Negotiations over the Build Back Better, social spending bill, also known as the Reconciliation bill in the Senate, remain ongoing, and soon Congress will also have to return its attention to increasing the debt ceiling again as the post-poned to December deadline looms closer.

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This week in the markets, we will continue to watch the progress in Congress on the Senate’s slimmed-down budget reconciliation bill, the price tag of which now 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 – October CPI
• Thursday – Weekly Jobless Claims
• Friday – Job Openings and Labor Turnover

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.

Thank you for sharing!