Weekly Market Update 11/08/2021
Another earnings season has come and gone, and this one has been stellar, with 82% of the S&P 500 companies beating expectations. Overall, profits climbed by more than 30% in the third quarter. Not surprisingly, the stock market continues to set records, with solid results boosting investor confidence. True, there have been disappointments (as supply-chain issues and labor shortages have worsened). Still, earnings growth remains above the longterm trend.
However, we think a new catalyst may be needed to boost stocks from here. For now, inducements to buy, in addition to profits, include lower incidences of COVID-19 and a rising share of the U.S. population being vaccinated.
Meantime, the economy is stumbling a bit, although it’s hardly on the ropes, as GDP did nudge ahead by 2.0% in the third quarter. Still, that was less than forecast and well short of the 6% plus rise in GDP in the first half. In assessing growth, we note that the economy slowed over the summer as consumers turned skittish (due to the Delta variant), and businesses grappled with supply shortages. Now, though, we see some firming down the homestretch of this year and into 2022, improvements on the disease front and the promise of a gradual rise in infrastructure spending due to hoped-for government action.
Into 2022 and beyond, a bigger problem than too little growth may be too much inflation, with prices of noncore food and energy items rising at the fastest pace in 30 years. Core spending, which excludes food and energy, is a preferred gauge of the Federal Reserve in assessing inflation. It is thus concerning for the bank, which is possibly looking at raising interest rates in 2022.
On balance, things seem in order. So absent an overly aggressive monetary response from the Fed, the business upturn should strengthen as we head into 2022. In fact, with declining COVID-19 infections and possible benefits from greater infrastructure spending, GDP growth should be sufficient to keep corporate profits rising.
Conclusion: We think the best course of action is to retain a decent weighting in equities, while being on the alert for signs greater caution is needed.