As we observe Veteran’s Day this week let us give gratitude to those who have served in the Armed Forces. We enjoy the freedoms we have today because of their bravery and sacrifice. Our country was founded on certain principles including liberty and freedom, for which our forefathers fought during the Revolutionary War and many of our family members, friends, and neighbors have more recently protected. By securing our freedom, men and women in uniform have also protected the capitalistic society from which we benefit. This enables us to work hard to earn a living, save money, and have investments for savings to grow.
Speaking of investing, the stock markets are again sitting at all-time highs with last week being the fifth consecutive week of gains, which were driven by positive economic news and continued strong corporate earnings. The earnings season is winding down with 85% of the S&P 500 companies now having reported. Not surprisingly the earnings reports were strong with many companies beating estimates and boosting forward guidance. Strong corporate profits and a growing economy should provide continued tailwinds for the markets. Historically speaking, the stretch from November through January is one of the best times of the year for the stock market. It remains to be seen if history repeats itself this year, but having a solid economy and continued growth in corporate profits leads us to believe there is no reason this year would be any different.
Beginning in March of last year, in response to the economic impact of the COVID-19 pandemic, the Federal Reserve (the “Fed”) has purchased $120 billion of bonds per month in an effort to keep interest rates low as well as signal the intention of using monetary policy to help support the economy. Last week on Wednesday, the Fed announced they are going to being “tapering,” or reducing, this monthly bond buying program, commonly referred to as quantitative easing, or “QE.” The tapering will consist of reducing those purchases by $15 billion per month which is expected to fully wind down the program by the middle of next year, but the Fed maintains flexibility to adjust in either direction if needed. Since this announcement does indicate the Fed feels the economy is close to fully recovering and able to stand on its own, it helped push the stock market higher even though this announcement was expected since the Fed generally signals their intentions in advance. The QE program helped keep interest rates low so we expect to see some rise in interest rates over the coming months. It is also now expected the Fed will begin to raise the base Fed Funds rate shortly after QE is fully wrapped up in the middle of next year.
The employment reports of the previous two months were weaker than expected, but still positive, which led some to believe the Fed could hold off on beginning the taper to ensure the economy was on stable footing. However, the Fed obviously felt strongly enough that the economy was at least stable, and most likely expanding, that they went ahead with the taper announcement. Their decision seems well justified since the October employment report on Friday was better than expectations and the previous two months were revised upwards, which should not be a surprise given we remain near record highs for job openings. The unemployment rate dropped to 4.6%, but even with these large jobs gains the employment-to-population ratio remains below where it was pre-pandemic and indicates we are still not at full employment. This shows there is still room to run in the labor market recovery and therefore further wage pressures may be limited.
Also on the economic front, durable orders, factory orders and the Institute for Supply Management (ISM) non-manufacturing survey all came in better than expected last week, providing further evidence the economic recovery remains intact and is not showing signs of slowing down. Data for labor costs and hourly earnings were higher than expected, which is not completely surprising given the current state of the labor market. Since labor costs, along with supply chain disruptions, seem to be driving inflation this leads us to believe inflation will continue in the foreseeable future.
Given the numerous surveys suggesting inflation continues to be the largest risk on investors’ minds, this coming week will be significant with the Producer Price Index (PPI) and Consumer Price Index (CPI) being reported. The stock market has enjoyed a healthy run since the beginning of October and with earnings season winding down it might be due for a bit of a slowdown; hopefully that is not the case and it continues to march upwards.
We also continue to watch the progress of the infrastructure and social spending bills, especially any revenue provisions, i.e. taxes, which might be included and how they would impact individuals. Political dynamics have changed over the past week with election results, especially two key gubernatorial races. This does not impact Congress directly but it does show that the Democratic party in Washington, which holds a razor-thin majority, does not hold the leverage once thought for passing these bills, especially going into mid-term elections next year.
We would like to especially like to recognize our firm’s founder, Joe Lucey, who is a veteran of the United States Marine Corps and the many clients who are veterans or have family members serving in the military. We do have a few spots remaining for our Veteran’s Appreciation Luncheon on Wednesday, November 10th with special guest speaker John Kriesel. Call our office for more details if you or a veteran you know would like to attend. Thank you to all vets for your service; we will never forget.
Have a wonderful week!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
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