Monday Market Update 11-22-2021

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The stock market had a bit of a seesaw ride last week, moving up and down from day to day as varying economic releases left investors with an uncertain economic outlook. October retail sales were better than expected, but housing starts were worse. Friday, the House of Representatives voted to approve the $1.85 trillion Build Back Better bill, but the news was dwarfed by other headlines, including new pandemic shutdowns in Europe. Get more 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 finished the week up +0.3%, but had a lot of ups and downs along the week to get there. After the first down week in months the week prior, strong retail sales Tuesday sent the market up, while weaker than expected housing starts led a sell-off on Wednesday. Continued improvement in jobless claims led positive sentiment Thursday, but the announcement of new Covid lockdowns in Europe amidst surging cases spooked the market again Friday. The market remains up 25.1% year-to-date.

Bond yields overall remained little changed from the week prior. They started the week rising on inflation concerns, before falling again amid rising Covid concerns and the impact that could play on the economic recovery. The yield on 10-year treasury bonds ended the week at 1.548%, and the 10-year spread to TIPS remains elevated as well, at +2.66%, still at levels not seen since pre-housing bubble collapse in the mid 2000s.

While the market has been essentially flat over the last two weeks, there has been movement within different sectors of the market. We have seen a separation between growth and value stocks again, with growth outperforming. Energy stocks were down -5% this week as oil prices fell amidst concerns of a demand slowdown if lockdowns become more widespread, while Tech and Consumer Discretionary stocks rallied, up +2.4% and +3.7%, respectively.

Bitcoin and other cryptocurrencies also sold off last week, potentially due to the signing into law of the new infrastructure bill, which is paid for, in part, by increased tax enforcement on cryptocurrency holders.

Last Monday, President Biden signed the $1 trillion infrastructure bill into law, and on Friday, the House of Representatives passed the $1.85 trillion Build Back Better Act – we now watch continued negotiations in the Senate and what they can pass via budget reconciliation before it is enacted as law.

Economic data releases for the week included:

  • Tuesday, 11/16 – October Retail Sales
  • Wednesday, 11/17 – October Housing Starts

We also got the usual Thursday Weekly Jobless Claims data, for the week ended November 13, 2021. More on all these stories below or get the full update on this week’s episode of Finance Explained.

October 2021 Retail Sales: +1.7% vs. September

After flat to down retail sales numbers since April, October retail sales surpassed expectations, increasing 1.7% vs. September. It is important to note, however, that these numbers include the benefit of inflation, which was up +0.9% in October per the CPI report.

For the month, retail sales, excluding restaurants were up +1.9%, auto sales +1.8%, grocery sales +0.9%, and restaurant sales were flat. Comparisons vs. October 2020 are extreme, given where we were a year ago, at the height of the pandemic, pre-vaccines.

Advanced retail sales are the earliest indicator we get each month of consumer spending, and if October retail sales are any indicator, consumer spending remains strong. This is key to a strong economy, as consumer spending represents 2/3s of our nation’s GDP.

Could strong October retail sales be holiday spending pulled forward, given concerns around the supply chain and the potential for shortages as we get closer to the holidays? We will have to watch the coming months to know for certain. I’m more concerned about what happens to consumer spending should advanced payment of child tax credits end and when student loan payments re-start in January.

Next Data Point?
November Retail Sales will be released December 15th

October 2021 Housing Starts: 1.52 million starts, -0.7% vs. September

October housing starts were 1.52 million at a seasonally adjusted and annualized rate. This is -0.7% lower than the month prior, but +0.4% higher than October 2020. While demand for housing remains elevated, home builders are contending with labor and material shortages, driving up the costs of construction and delaying completions.

Permits in October were up +3.4% vs. October 2020, but completions are down -8.4% and continue to lag futher and further behind housing starts due to lack of labor and materials.

For the entire last decade, in the aftermath of the Great Recession and housing market bubble burst, we have signficantly underbuilt relative to household growth. This has now created a housing supply shortage.

This shortage relative to demand from households, as well as the labor and material shortage which is increasing the cost of construction, has pushed up new home prices. For the first time ever, new homes sold for a median price point over $400,000 in September 2021. Updated pricing information for October will be out this week on Wednesday.

Like many other sectors of the economy, this is not a supply-demand imbalance situation that will be alleviated overnight. As interest rates rise as we head into 2022, we may see some reduction in demand, but in my opinion, not enough to drive down prices from current elevated levels… just enough to maybe slow the growth in prices.

Next Data Point?
November Housing Starts will be released December 16th

Weekly Jobless Claims for 11/13/2021: 268,000 new claims

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

For the week ended November 13th, new initial jobless claims were 268,000. This is a decrease of 1,000 from the previous week’s level, which was revised up from 267,000 to 269,000, Continued claims for the week ended November 6th also decreased to 2.1 million, a decrease of 129,000 from the previous week’s revised level, and the lowest level for insured unemployment since the start of the pandemic. It represents a 1.5% insured unemployed rate, a 0.1% decrease from the week prior.

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 reversed trend in November. New cases are now running 30% higher than pre-Halloween low point.

The rise of cases ahead of the holiday season is concerning, and has officials encouraging vaccines for all eligible, as well as boosters, which are now available to all adults over the age of 18 and strongly recommended for the elderly and all those who received a single dose Johnson and Johnson vaccine. You can see the latest guidelines on boosters from the CDC below.

Currently, nearly 70% of the entire US population has received at least 1 dose, nearly 60% are fully vaccinated and 18% have received boosters.

It should also be noted that rising cases across Europe have now prompted some governments to re-enact lockdowns. Specifically, Austria has instated a 10-day lockdown to stem the spread after a spike in cases. Germany’s health minister warned that he fully expected all German citizens to be “vaccinated, recovered or dead” by the end of winter, implying infections will be widespread. In response to the news coming out of Europe, this week the White House confirmed there no plans for US lockdowns.

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

Political Update

Two big news item coming out of DC last week. First, President Biden signed the $1 billion Infrastructure Bill into law last Monday. For a breakdown of that bill, you can see it on the Weekly Market Update from November 8th. For the most part, it is truly a traditional infrastructure bill, with funding for ports, airports, rail, roads and utilities. It is now officially law.

Second, on Friday, the House of Representatives passed the Build Back Better Act, also known as HR 5376. You can check out all nearly 2,500 pages of it here.

Estimates for the cost of the bill range from $1.8 to upwards of $2 trillion. I have relied on summaries from a variety of news sources (WSJ summary, Times summary), referenced back to the bill itself, as well as the Congressional Budget Office’s scoring of the bill, the official non-partisan budget estimator for all legislation.

The largest single initiative in the bill is for Climate Change, totaling over $500 billion. This includes $320 billion in 10-year expanded tax credits for residential and utility-scale renewable energy, transmission, electric vehicles and clean-energy manufacturing; $105 billion to boost resilience to the effects of climate change, such as wildfires and droughts; $110 billion to grow U.S. supply chains for renewable energy technology; and $20 billion to motivate the government to purchase cutting-edge energy technologies.

The next single largest segment of the bill, with an estimated cost of $275 billion, is a controversial one – increasing the SALT cap. SALT stands for state and local taxes. Prior to the Tax Cuts and Jobs Act of 2017, also known as the Trump tax cuts, all state and local taxes were deductible for Federal tax purposes. This, however, greatly reduced federal tax revenue from high tax states, like my own, who carry both high property taxes and state income taxes. The TCJA of 2017 capped this deduction at just $10,000. In my state, that barely covers the property taxes on a median-priced home, nevermind the income taxes. So many families in high-tax states actually saw federal tax increases following the tax cuts.

The Build Back Better Act raises this cap from $10,000 to $80,000, and extends it from 2025 to 2030, before dropping it back to $10,000 in 2031. Opponents say this is a tax cut for the rich (property owners and high-income earners in high tax coastal states), which leaves lower-tax states to subsidize them. How this initiative specifically is “paid for” is also a great example of the way Congress does math. It’s never about the absolute spending level – it’s always about the change from the prior estimated spending level. Since this cap was scheduled to expire in 2025, by extending the cap, even at a higher level to 2031, they claim the initiative “pays for itself.”

A series of initiatives are also intended to support families and children – this includes $270 billion for affordable childcare, $110 billion for universal preschool, $200 billion to extend the increased child tax credit (from $2,000/child to $3,000/ child and $3,600/child under 6) for just one more year in 2022, as well as $200 billion for 4 weeks of paid family and medical leave. This is another area where there’s some playing with timing to bring down the cost of the bill for Congressional math sake, but the actual cost will be greater.

As an example, for affordable childcare, there are funds to raise childcare providers’ wages, build new facilities, and train teachers, as well as subsidize low and middle-income families’ cost of care. After 3 years, the entitlement would expand to nearly all families with guarantees that no family making less than 250% of their state’s median income would pay more than 7% of their income on child care, and families making less than 75% of the state’s median income would pay nothing. But the bill ends the program after 6 years. Entitlement programs never just end – so really, it just includes the cost of the program for 6 years.

Similarly, for universal preschool. There are funds for the first 3 years to set up universal preschool nationwide – but after that the program is proposed to be funded through a split that increasingly shifts the cost to states, and it assumes the program ends after 6 years. Both of these are examples of why you hear experts saying the headline cost may be $2 trillion, but the actual cost will be far higher.

There are a series of other initiatives – including $150 billion for Affordable Housing, $165 billion for Healthcare, including extending Affordable Care Act subsidies for insurance premiums through 2027 and capping out-of-pocket prescription drug costs, and $150 billion for Affordable Home Care for the elderly.

How is it being paid for more broadly? Through tax increases. There are corporate tax increases, including a minimum 15% tax on corporations with reported profits over $1 billion. These are companies who report these profits to shareholders, but through structuring, international operations, capital investments, and various deductions may otherwise have paid far less in taxes. There is also a 1% surcharge on company stock buybacks.

For individual income taxes, there is a 5% surcharge on all income over $10 million, and an additional 3% for a total of 8% surcharge on income over $25 million. There is also funding to double the size of the IRS to increase tax law enforcement.

As with many large spending bills, the spending is front-end loaded, while the initiatives to pay for it are back-end loaded. Through the first 5 years, the CBO estimates the Build Back Better Act would add $800 billion to the national debt.

To be clear, this is not yet law – it first has to also be voted on and approved by the Senate, then signed into law by the President. The Senate is still negotiating the bill, and plans to attempt to pass it through the budget reconciliation process. This allows them to sidestep the 60 votes required to avoid a filibuster, and pass it with just a simple majority. Given the Senate is split 50-50 between Democrats and Republicans, the Vice President serves as the tie-breaking vote.

However, more moderate Democrats, particularly Senator Joe Manchin of West Virginia and Senator Kristen Sinema of Arizona, have both expressed hesitations in voting for the House version of the bill, so negotiations are ongoing. The Senate is also limited by what can be passed through a budget reconciliation process – and some items, like $100 billion for immigration-related provisions – may not make that cut.

If the Senate makes changes to the bill before passing it, the House would then have to vote on it again, and only then would it go to the President to be signed into law. The Senate Majority Leader, Chuck Schumer, has indicated he hopes to bring the Senate version to a vote before Christmas.

This week in the markets, we continue to watch negotiations in the Senate on the Build Back Better Act, and now return attention to the looming debt ceiling deadline, which we are projected to in mid-December.

On the economic front, we will get more October housing data ahead of the long holiday weekend, and are also waiting on President Biden’s Fed Chair nomination…

  • Monday – Existing Home Sales
  • Wedneday – New Home Sales

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!

About Meghan

Meghan spent nearly a decade as a Financial Analyst, before spending the last 7+ as a SAHM to three little ones. She shares simple money tips for moms to help your family reach your financial goals by building a financial plan you can LIVE with! You can learn more about her background in finance, catch her daily on Instagram and Facebook, and her weekly live discussions in her community for Family Finance Moms.

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