Sightline Weekly Market Update: Markets Climb the Wall of Worry
Equity markets finished the week with mixed results. The Dow Jones, the largest capitalized market and most liquid, is favored by foreign investors. The S&P 500 is favored by institutional investors and the Nasdaq by retail investors. Recently, fund flows into these markets indicate cohort investor sentiment divergence. Last week, the Dow Jones fell 1.38%, the S&P cautiously gained 0.32%, while the Nasdaq, hitting new highs, jumped 1.24%, supported by consumer discretionary and technology stocks. The TSX fell 1.00% as the oil price came under pressure, losing 6% on the week on news that China and the US discussed releasing strategic reserves and US inventories rising for the first time in five weeks.
European equity markets were mixed as well; however, increasing Covid infections and lockdowns impacted investor sentiment. The STOXX Europe 600 Index was up 0.14% in the week, the German DAX Index gaining 0.41%, the French CAC 40 advancing 0.29%, Italy’s FTSE MIB Index fell 1.49%, and the UK’s FTSE 100 Index dropped 1.69%.
The economic calendar in the US provided indications of strengthening expansion. Last Tuesday, the Census Bureau released October retail sales and services ex-autos, which were up 1.7% versus 0.7% in September. Retails sales and services, including autos, were up 1.7% versus 0.8% in September. The increase was the largest since March, when the government handed out stimulus cheques.1 Additionally, the Federal Reserve reported a jump in industrial production to 1.6% in October after a decline of 1.3% in September. The Fed reported half the gain in October reflected the recovery from hurricane Ida. Manufacturing output increased 1.2%, including autos and parts and 0.6% ex-auto and parts. Total industrial production is up 5.1% from a year ago. Another positive indication of economic recovery is the rebound in capacity utilization to 76.4% from 75.2% in September. The current rate is the highest since January 2019, however, it is still below the long-run averages.2 US building permits showed an increase to 1.65 million compared to September’s 1.59 million. As a sign of material and labor shortages, housing starts showed a slight decrease to 1.52 million from 1.53 million.3
For the week ending November 13, the Labor Department reported initial claims of 268,000, a decrease of 1,000 for the week earlier. Continuing claims for all programs rose 618,804 to 3,184,657 from the week earlier.4 Labor shortages are still limiting businesses’ ability to return to full production, causing many companies to scale back hours of production. While recent data is supportive of growth momentum, continuation is likely to come under pressure unless more workers are willing to rejoin the workforce. Other limiting factors are work restrictions regarding vaccine requirements and passports for specific industries. The most recent policy response restricting employment to only fully vaccinated employees is likely to add more strain and impede the re-opening further. As seen this weekend in Europe, resistance is increasing against vaccine mandates and restrictive lockdowns. If this type of confrontation continues, economic growth will be undoubtedly slow.
For many, the current equity bull market is running on fumes. If the market can hold for the balance of the year, it will be one of the few times the S&P 500 has enjoyed three consecutive years of double-digit returns. With all the uncertainty surrounding Covid infections, policy responses to Covid, the election of the Federal Reserve chairman, tapering of asset purchases by the central banks, inflation, and US mid-term elections, it will not be surprising to see a correction in 2022. In the meantime, the market continues to climb the wall of worry.
Warren Gerow is an independent investment wealth consultant to Sightline Wealth Management.
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