04 November, 2021

Weekly Market Recap [Nov-5-2021]

Earnings, Jobs, and Fed Decision Drive Markets

 

Equity markets reached new all-time highs this week in Canada, the U.S., and Europe based on continued strength in corporate earnings and a U.S. central bank announcement to begin pulling back on stimulative monetary policy that was in line with expectations. The Fed’s announcement of so-called “tapering” – a reduction in the purchase of bonds and mortgage-backed securities - is the first reduction in its stimulus programs since the pandemic started.

 

Fed Chairman Jerome Powell indicated that he expects conditions that are pushing inflation higher to last “well into next year”, however maintains that inflation is a transitory phenomenon. Supply chain bottlenecks, shortages in materials and manufacturing inputs, and higher shipping costs which can be seen as temporary conditions have played a large part in pushing up prices generally. Whether inflation effects turn out to be transitory or not is a key question on the minds of many investors. 

 

At the same time, the Fed indicated that interest rate increases are not contemplated at this time, and if they occur, will happen after quantitative easing efforts have largely ceased. 

 

We’ve seen a broad-based rally in almost all sectors this week, with tech stocks, consumer discretionary, and cyclicals leading the way. Third quarter corporate earnings continue to impress. So far, more than 80% of reporting companies have posted earnings that have topped expectations climbing by an average of approximately 40% year over year – one of the best showings ever. 

 

The number of Americans filing new claims for unemployment benefits fell to 269,000 – beating expectations and reaching a 20-month low last week, as gains in employment continue to show that economic indicators are gaining momentum. U.S. job growth in October also beat consensus expectations and the unemployment rate decreased to 4.6%. Employment growth has been solid based on consumer demand and a sustained decrease in the number of new COVID-19 cases. 

 

Canada’s unemployment rate has also been trending downward as the workforce expands and businesses return to more normal operations, with the rate of unemployment moving below 7%. 

 

In Canada, cyclical stocks including Industrials and Financials and have pushed the S&P/TSX higher.  After a solid October, the S&P/TSX also reached a new high this week, providing investors with a return of approximately 22% year-to-date.  Rising oil prices have pushed Energy stocks higher, while expectations for higher interest rates, a steeper yield curve, and increased dividend payments have propelled the Financials sector. 

 

Markets have been riding a crest of optimism lately reflecting strong corporate earnings. With inflation running higher and equity valuations getting stretched, ongoing debate about ‘’where we are headed from here” continues.  Inflation could impact consumer sentiment, an important driver of the economy. Consumers are facing higher prices for essentials including food, gasoline, housing, and home heating. Whether this discourages continued growth is an open question, as there is also a significant amount of pent-up consumer demand based on a massive stockpile of savings, and wealth effect created by rising real estate values and investment portfolio growth. Optimism and eventual spending of this cash reserve could play a large part in driving the economic growth trajectory going forward.

 

Market news and announcements are continuously changing. Investors are encouraged to maintain a long-term perspective, taking confidence from the latest news, but keeping their focus on more distant horizons knowing that at times, volatility is expected. Market returns are cyclical in the short term. However, research has shown that investment portfolios show less variability in returns over longer holding periods.

 

• Short-Term View: Corporate earnings have propelled equity markets, reaching all time highs.   

 

• Longer-Term Thinking: Sticking to your long-term plan through periods of volatility is central to investment success.

 

• Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.

“The inflation dynamic remains an important theme to watch in Q4 and into 2022, particularly from the wages angle where most industries and job tiers are experiencing an acceleration. Not only do we believe wages have even further to accelerate, but we also think a lot of the gains already experienced have not been reflected in the official inflation numbers.”

 

Steve Lock, Portfolio Manager and Co-CIO

Mackenzie Investments

Fixed Income Specialist

 

 

Over the past 10 years, markets have been positive. Perspective is key.

 

 

 

Source: Morningstar Direct. Growth of $10,000 shown. Total returns from January 1, 2010 to Nov 4, 2021 in local currency.