Market says…
The Monday blues were so real this week – worries over Evergrade (more on this below) basically tipped over the first domino after which worries about a slowing economy from rising COVID cases and supply chains bottlenecks continuing to dampen productivity added to the chaos. And then China declared all cryptocurrency activity illegal, which hurt market sentiment pretty much overnight and pulled down fintech stocks with exposure to cryptocurrencies. The S&P 500 finally had its 5%+ correction moment this week but stocks managed to make up losses to end the week basically flat.
Moral of the story: Volatility in the market is to be expected for a while at this point – markets have run and there are enough risks out there to suck the air out from this level of exuberance. However, investors aren’t throwing the baby out with the bathwater here (separately, why was this saying ever a thing? who’s confusing babies with bathwater?). Though these concerns are putting a ton of pressure on some stocks (especially tech type stocks that are trading at rich valuations), reopening/cyclical types of stocks are actually doing fine. The current market is a stock picker’s stressful, but wonderful dream. Also, there’s just so much liquidity in the market that any weakness is snatched up by dry powder sitting on the sidelines – hence losses earlier in the week were totally erased by Friday.
Data says…
We saw an unfortunate trend start to make its way into jobless claims numbers. New unemployment claims have increased for two weeks in a row now and came in last week at 351k, 31k higher than expectations and 16k higher than the prior week. The biggest increase in claims came from California (+18k) but some of that might be driven by the transition from expired federal unemployment insurance benefits to other unemployment benefit programs. Separately, both the manufacturing and services PMI indices released this week indicated strong demand but continued supply pressures leading to price increases.
Moral of the story: The expectation was for the labor market recovery to get a boost after federal unemployment benefits ran out and kids went back to school. We’re not really seeing it happen aggressively, which begs the question – is it just taking time or is it actually not going to happen? Fingers crossed this is just a timing issue, otherwise we could see a more meaningful impact on the consumer’s health, which would not be great in the midst of elevated inflation levels.
Fed says…
The Fed’s September meeting went largely as expected – interest rates were kept basically at zero and updated economic projections pointed to slower growth (5.9% growth vs 7% previously expected) and higher inflation (3.7% inflation vs 3% previously expected) for this year than previously expected. The FOMC indicated they might be taking their foot off the gas pedal sooner than expected (asset purchases and rate hikes) if progress continues as anticipated on the economic recovery.
Moral of the story: We’re apparently getting closer to the Fed’s super vague goal of “substantial further progress” on employment and inflation (tbh we’re DEFINITELY there on inflation…like come on). Markets were a little shaky on the back of this news but stocks ended showing pretty strong gains and bonds were somewhat mixed. It’s good to see that the Fed is reacting in some capacity to the reality of what’s actually happening in the economy, the concern for me is whether it’s happening fast enough.