November 2021 | Equity Commentary
Published on December 7th, 2021
U.S. equities continued to rally in early November on stronger economic data and fading risks from the Delta wave. Covid-19 cases moved higher later in the month, however, and the emergence of the Omicron variant spurred volatility around the Thanksgiving holiday. Snarled supply chains and longer-than-expected inflation also continued to weigh on sentiment, particularly as kitchen table issues such as higher gas and food prices send mixed signals to investors about whether the economy is indeed strong. To cap off the month, Federal Reserve Chairman Jerome Powell effectively dropped the “transitory” inflation narrative and signaled the Federal Reserve may need to move more quickly to combat rising prices. The S&P 500 finished the month with a total return of negative 0.7%, while 10- and 30-year U.S. Treasury bond yields declined.
U.S. economic re-acceleration largely surprised to the upside in November. For the week ending November 20, the number of workers filing for unemployment benefits (jobless claims) fell to 199,000, marking the lowest level in 52 years1 and underscoring tightness in the labor market. Jobless claims serve as a proxy for layoffs, so it makes sense to us why they are so low employers that have workers don’t want to lose them. In the last week of November, claims remained very low, in our opinion but rose slightly to 222,000.
We believe consumer and investor sentiment appear somewhat anchored to supply chain and inflation worries, but corporate earnings and other gauges of economic activity continue to point to sustained levels of demand, production, and growth. There is arguably a growing disconnect between expectations for sustained inflation and holiday shopping shortages and the reality of record economic activity and profits. This disconnect appears likely to open the door for positive growth and earnings surprises, which have historically worked in equity markets’ favor.
Entrepreneurs and self-employed workers are also contributing to the tight U.S. labor market. There are now 9.4 million self-employed workers in the U.S., according to the Labor Department, which marks a 500,000 increase since the start of the pandemic. Many workers are eschewing service sector jobs to set out on their own as consultants, freelancers, or small business owners. In 2021, the share of U.S. workers employed by a large company (more than 1,000 employees) fell for the first time since 2004, while the number of self-employed workers is at its highest level in 11 years. The number of self-employed workers may continue to rise from here—in September alone, 4.4 million people resigned from their jobs, a record.1
President Biden signed the infrastructure bill into law on November 15, which paves the way for significant investment in traditional forms of infrastructure, like roads, bridges, the electrical grid, rail, water, and broadband. The $1 trillion price tag actually represents $550 billion in additional spending above projected federal spending for roads, bridges, etc. This level of spending marks the largest investment in infrastructure in over a decade and should provide modest tailwinds for economic activity and growth. In addition, since the spending is spread out over a decade, we believe the inflationary impact should be small.
Early signs suggest the holiday shopping season may prove sturdy in spite of the ongoing pandemic, supply chain issues. and rising prices. RetailNext, a research firm that tracks in-store shoppers, said foot traffic in stores was up 61% this Black Friday compared to 2020, when many consumers were still skittish about the spread of Covid-19. Consumer enthusiasm to get out and shop led to online sales falling slightly year-over-year, from $9 billion in 2020 to $8.9 billion this year. U.S. consumers continue to propel the economy forward, having increased their spending by about 4.4% on average over the last five years.
Activity in factories, mines, and utilities in the U.S. rose at a solid 1.6% month-over-month clip in October, which followed a slowdown in September tied to the rise of the Delta variant.2 The October reading shows companies working to bring production back up to full capacity. Manufacturing, which is the biggest component of industrial production, rose by 1.2%.2 Momentum continued last month, as the Institute for Supply Management said its index of factory activity rose from 60.8 in October to 61.1 in November. Any reading above 50 signals expansion.
The U.S. housing market also remains quite strong. The average price of a home in a major U.S. city, as measured by the S&P CoreLogic Case-Shiller National Home Price Index, rose 19.5% year-over-year in September. This figure is down slightly from the 19.8% annual rate posted in August, but nevertheless points to consistent and above-average growth. Sales of previously owned homes are set to reach their highest level since 2006.
The U.S. economy is fundamentally strong, but there are also a few negatives that warrant some caution in the near term. The Federal Reserve, for one, has shifted their messaging materially over the last couple of weeks. In a Senate hearing on November 30, Chairman Powell allowed that “pricing increases have spread much more broadly” than anticipated in the economy, and that the Federal Reserve “didn’t predict supply-side problems.” Shifting focus to price stability, the Federal Reserve may be setting the stage to accelerate the reduction of its asset-purchase (QE) program, which could in turn open the door to interest rate increases sooner rather than later.
The Omicron variant, and the potential for a ‘winter wave,’ could also potentially create some headwinds to growth. Early indications show the variant being no more deadly than previous strains, and vaccines also appear effective at continuing to provide protection against severe cases. Two new antiviral pills – one from Merck and another from Pfizer – could receive emergency use authorization in the coming weeks, which would add another layer of defense against hospitalizations and deaths and thus help to curb adverse economic impact. There are more unknowns than knowns in this moment, however, and uncertainty may drive volatility in the short term.
Finally, a modest and likely fleeting background negative is government funding and the debt ceiling, which we anticipated would return to headlines in early December. Political posturing and hamstringing funding bills is likely in the coming days and weeks, but early signs point to a more-than-usual amount of negotiation happening between parties. Congress voted on December 2 to extend government funding through February 18, and now must address raising the debt ceiling as well as the fate of the $2 trillion Build Back Better bill.
1 Source: Bureau of Labor Statistics