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By Ben Norris, CFA, Securities Research Analyst, Associate Vice President

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Stocks finished mildly lower last week, dragged down by weak performance in the Consumer Discretionary, Energy, and Communication Services sectors. Stocks in the Materials and Industrials sectors were strong performers following the passage of the much-anticipated U.S. infrastructure spending package. The S&P 500 (SPX) finished the week 0.3% lower and ended its five-week streak of gains but is still up an impressive 26.2% year-to-date. The Dow Jones Industrial Average fell 0.56% and has gained 19.8% for the year. Global stocks fared better than their U.S. counterparts last week with the MSCI World (ex-U.S.) index showing a small gain led by very strong performance out of Emerging Markets stocks. This contrasts with weak performance year-to-date, where the MSCI Emerging Markets index is up just 1.7% on lagging returns in Chinese stocks. Bond yields moved higher last week leading to underperformance in the major U.S. bond indexes.

The move in rates was likely due to two factors: 1. The passing of the infrastructure package and its potential inflationary effect as more money is injected into the American economy. 2. Inflation concerns continue to weigh on investors. The passage of the infrastructure deal led traders to shift to a risk on stature early in the week and yields increased as a result. On Wednesday, inflation numbers were released and came in higher than expectations. The U.S. Consumer Price Index (CPI) was up 0.9% versus the prior month and has increased 6.2% year-over-year, which is the largest increase in roughly 30 years. The stronger- than-expected reading had investors worried that the Federal Reserve may have to raise rates sooner than previously thought. In fact, the implied chances of a rate hike by June of 2022 rose from 55% to 77% on Wednesday as rates surged.

The inflation and interest rate picture remained concerning for the rest of the week. On Friday, the University of Michigan Consumer-Sentiment Index came in far below expectations and notched its lowest reading since 2011 as consumers become more aware of inflation implications. Household inflation expectations for the next 12 months rose to 4.9% in the survey, up from 4.8% in October. If the inflation trend persists – as many investors suspect it will – we should be prepared for somewhat weaker equity returns. According to the CFRA, since 1994, the S&P 500 has underperformed in months when inflation exceeded the long-term trend with a 0.21% average return versus a 0.77% return in all other months.

On Thursday, the typical U.S. jobless claims numbers were released and came in at 267,000 the 260,000 expected. While the number was a disappointment, numbers still improved slightly from the week prior and have made significant progress since their April peak. The third-quarter earnings season began to wind down last week and will essentially conclude this week with consumer-focused companies reporting results. Corporate results have seen a strong rebound relative to pandemic-suppressed numbers in 2020 and have been promising enough to help investors largely ignore some of the economic issues discussed above. Through last Friday, just over 90% of the S&P 500 had reported third-quarter earnings. Reported results have come in 10% better than Wall Street estimated at the beginning of the season and the S&P 500 has risen about 9% over the last six weeks. There is a saying that prices follow earnings – in the long run stock prices are driven by a company’s underlying earnings power. That seems to be the case in the current market – for as scary as higher interest rates and higher inflation might be — at the end of the day, investors generally prefer to focus on good news, which in this case, is strong corporate earnings in an otherwise difficult environment.

I want to briefly follow up on the infrastructure bill for those that may not be following that story as closely as we are in St. Louis. The bill that was signed into law by President Biden on Monday is the largest investment in the country’s infrastructure since the early 1980s. While the total cost of the program is $1.2 trillion, the new spending created by the bill is closer to $550 billion – still a sizeable investment in returning the country’s roads, bridges, railways, airports, waterways, etc., to a globally competitive condition. A total of $110 billion will go to roadways, $66 billion to rails, $65 billion to high-speed internet access, $65 billion to the power grid, and $55 billion to water and sewage. Much of the language in the bill pushes for spending to focus on green and renewable solutions where possible. The expectation is that the plan will add two million jobs per year to the economy over the life of the plan. While the bill has been politically polarizing, much of the substance of the bill addresses legitimate needs for American infrastructure and was always expected to have an easier path to becoming law compared to the larger social infrastructure bill that is still being debated in Washington.

The upcoming week features a busy schedule of economic releases. Consumer spending will be a focus with Tuesday’s retail sales report. Jobless claims will remain in focus after disappointing last week. Separately, consumer focused companies will report earnings throughout the week and should provide further insight into consumer trends.

Date Report Previous Consensus
Monday 11/15/2021 Empire State Manufacturing Index

19.8

22.0

Tuesday 11/16/2021 Retail Sales

0.7%

1.5%

Industrial Production

-1.3%

0.8%

Capacity Utilization

75.2%

75.8%

NAHB Homebuilders’ Index

80

80

Wednesday 11/17/2021 Housing Starts

1.56M

1.58M

Federal Reserve Speakers
Thursday 11/18/2021 Initial Jobless Claims

267K

260K

Continuing Jobless Claims

2.16M

Leading Economic Indicators

0.2%

0.8%

Friday 11/19/2021 Federal Reserve Speakers

 

Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.

November 16, 2021 |