11/08/2021
Stocks closed at a record high for the third straight week. The primary catalysts this time were the decidedly less ominous policy decisions by both the Federal Reserve (the Fed) and the Bank of England (BOE). Also contributing to the upbeat mood were continued strong third quarter earnings, and a potentially game-changing Covid therapy from Pfizer.

As anticipated, the Fed did announce the start of tapering, beginning this month, with the intention of completely winding down its bond buying program by the middle of next year, assuming the economy evolves as expected. Fed Chair Jerome Powell went to lengths to make it clear that any decision to eventually raise interest rates was independent of the taper decision. And the Fed stuck to its view that the current spike in inflation would likely be transitory, but did leave open the possibility that it might not be. Nevertheless, investors interpreted the Fed’s message as reducing the likelihood of several rate hikes by the end of next year, as well as a first hike coming as early as mid-year.

Bond yields reacted quickly to the Fed’s decision. The yield on the two-year Treasury note had risen from 0.22 percent on September 21 to 0.51 percent by last Tuesday. Following the Fed’s decision, however, the yield began to decline sharply, ending the week at 0.40 percent. The ten-year note yield fell 15 basis points, closing the week at 1.45 percent. Fed fund futures also eased following the decision. They are still anticipating the possibility of rate hikes beginning next year, but the probabilities declined. 

The Fed got some good news on Friday with the October jobs report, which evidenced further progress toward the Fed’s objective of full employment, especially welcome following a couple of months of sluggish job growth. The economy created 531,000 new non-farm jobs during the month, well above the expected 450,000, and added an additional 235,000 from revisions to the prior two months. The unemployment rate fell to 4.6 percent. Private payrolls were particularly strong, especially in the travel and leisure sector as the economy continues to normalize.

The Bank of England was widely expected to announce a rate hike last Thursday in response to its own inflation concerns. But the BOE surprised markets by leaving rates unchanged, setting off an even sharper reaction in the bond market to that in the U.S. UK ten-year yields plunged 23 basis points to end the week at 0.84 percent. And two-year note yields collapsed by 30 basis points to close at 0.40 percent.

Stocks Rise For Fifth Straight Week as Third Quarter Earnings Continue to Exceed Expectations

The S&P 500® Index gained 2.0 percent last week. It was the fifth straight weekly gain for the index, and the best since late June. During those five weeks, the index has climbed 7.8 percent, and experienced only six down days. Especially strong at week’s end, following news of encouraging results from a Covid pill study by Pfizer, were so-called reopening stocks in a position to benefit from the promise of further and faster progress against the pandemic. Conversely, other pharmaceutical companies competitively disadvantaged by the news, suffered sharp losses. Third quarter earnings results also continued to exceed expectations. According to Factset, with roughly 90 percent of results complete, aggregate earnings are now expected to rise by 39.1 percent. At the end of the third quarter, earnings were forecast to rise by 27.4 percent. Revenues are also exceeding expectations, on target to rise 17.3 percent, up from 14.9 percent at the end of the quarter. And fourth quarter expectations have remained steady.

Eurozone equities have been on a similar run to those in the U.S. The EuroStoxx 50 index has also risen for five straight weeks, gaining 8.1 percent. That gain is trimmed to 7.8 percent for dollar-based investors. The MSCI EAFE index overall has risen 4.8 percent in dollar-terms during this five week period.

Infrastructure Bill, October Consumer Price Index Headline What Investors are Watching for This Week

On the fiscal policy front, the House passed the bipartisan infrastructure bill that had been held up over intra-party negotiations among Democrats regarding the scope and timing of the President’s social infrastructure package. Those negotiations are ongoing.

Wednesday’s scheduled release of the October consumer price index headlines this week’s economic calendar. The Bloomberg consensus anticipates a year-over-year increase of 5.9 percent in the headline rate, up from 5.4 percent in September, and an increase to 4.3 percent from 4.0 in the core rate. An increase of such magnitude would do little in the near-term to reinforce the view that rising inflation will prove to be transitory. Along with the strong October jobs report, however, it would reinforce the Fed’s decision to begin tapering.

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