Weekly Market Update 11/01/2021
Wall Street is back to setting records. This renewed strength came after a stellar profit performance in the third quarter, in which a range of financial and industrial concerns showed notable improvement. In all, 84% of the S&P 500 companies had positive earnings surprises in the period. That helped offset a series of political, economic, and pandemic headwinds and pushed the Dow back above 35,000.
For now, at least, stocks are rising despite some persisting issues. These include the tense budget and debt-ceiling negotiations, lingering uncertainties on the economic growth and inflation fronts, and questions on Federal Reserve monetary policy. Now, new wrinkles are being added, such as supply chain disruptions, labor shortages, and spreading work stoppages. Intensifying problems on any of these fronts could cause another shift in market sentiment.
The key unknown is inflation. For four decades, pricing has been little more than a slight diversion, with incidences of rising costs few in number and brief in duration. That could be the case again. Still, with a barrel of West Texas Intermediate crude nearing $85, supply chain bottlenecks proliferating, and work stoppages on the rise, this time might well be different. In fact, if the Fed senses a shift in inflationary expectations (a major barometer for the bank), monetary restraint in the form of higher Fed-controlled interest rates could come sooner rather than later. That, too, would hurt market sentiment.
Where do we go from here? Much will depend on upcoming reports on producer and consumer prices, wages (which have accelerated recently), and activity on the labor front. This latter issue clearly bears watching, as signs point to a possible break in the four decades of labor peace. True, it’s early to suggest a major shift in pricing expectations, but some caution might be in order. For now, the stock market is suggesting comparatively reassuring prospects.
Conclusion: Strong profit growth and the likelihood the next few quarters will see an encore should help stocks going forward. However, uncertainties remain, especially on the pricing, political, and monetary fronts and these will need to be monitored