Tap the brakes again in Laborland! BLS reported US nonfarm payrolls only increased by 210,000 in the month of November. Moreover, the revisions to the two prior reports, while positive (82,000 additional jobs), were nothing to write home about. The silver lining is that the composition of last month’s figures suggests that the fundamentals underpinning the labor market are a bit stronger than the headline number indicates. U6 finally broke below the 8% threshold for the first time since March of 2020! Meanwhile, labor force participation increased to 61.8%, which also happens to be its best showing of the year. The average American workweek came in at 34.8 hours with wages increasing 0.3% MoM, and there is no sign that the appetite among US employers for workers has abated. In summary, the health of the labor market is still intact, BUT we certainly expect some more choppiness within financial markets heading into 2022 given recent events (i.e. omicron and a decidedly hawkish pivot from the Fed). Before we get to those points of interest let’s take a quick look at what is happening elsewhere in the domestic economy…
According to the University of Michigan, consumers are not liking what they are seeing this holiday season! Sentiment, current conditions, and expectations among Americans are all stuck in the Covid doldrums. On average these indices are lower by ~12.5% YoY— and let’s keep in mind that at this time last year we were reveling in what 2021 could be as each week brought tidings of joy regarding the efficacy of various vaccines. Back to the present, November’s survey figures were also particularly discouraging as the composite index declined by nearly 6% MoM. It is also important to note that these surveys do not account for the omicron variant. Please keep in mind that the World Health Organization (WHO) first classified B.1.1.529 as a “variant of concern” on November 26. On the bright side, however, personal spending among US households held up nicely in November with an increase of 1.3% MoM.
While things are looking a tad “iffy” on the consumer front heading into the heart of retail season, manufacturers are doing rather well. The most recent stateside ISM manufacturing PMI clocked in at 61.1. There was also a hint of optimism within the report regarding supply chain bottlenecks AND workers coming back to the labor force! We certainly view ANY positive news on the supply chain front as a tailwind for the real economy. In addition, any easing of price pressures could also provide Jay Powell some much needed cover as we approach yearend. Speaking of the Federal Reserve, Mr. Powell has been reappointed by the Biden administration for another four-year term at the helm of the world’s most powerful central bank. Will the next four years of monetary policy look different than the last?
Chairman Powell and Secretary of Treasury Yellen addressed Congress this past week. As per usual, the questions from both chambers covered a broad range of topics, but inflation was certainly a clear concern among legislators in both the Senate and House of Representatives. In fact, Mr. Powell stated before the Senate Banking, Housing, and Urban Affairs Committee that it is time to “retire” the term “transitory” as it relates to inflation. In order to stem the pace of rising prices, Powell suggested that the Fed is open to increasing the speed of the Fed’s tapering program, which opens the door for dialogue regarding short term rate increases. Of course, this is a rather hawkish move from the Fed, and global markets (already grappling with renewed Covid uncertainty) naturally took the news on the chin. The primary risk is that Powell and Co. tighten monetary policy into an already slowing economy (a la Q4 2018). So, does this change anything strategically for risk assets as we closeout 2021?
The short answer is, “No.” Chairman Powell’s language regarding a faster taper was certainly a surprise. However, he and various Fed governors had also signaled a willingness to adjust the pace of the tapering program in prior weeks. So, to see the Fed articulate its openness to a faster winddown of bond purchases is not exactly a shock, especially after the unexpected jump in core CPI and PPI (0.6% and 0.4% MoM, respectively) that we saw last month. The fact of the matter remains that the US economy is still on solid footing and financial conditions remain quite conducive to further growth in 2021. Will there be bouts of financial market volatility as the Fed and other central banks adjust monetary policy? Certainly. Will there be more Covid variants in future? Without a doubt. However, the outlook for earnings is quite bright and our fair value estimate for the S&P 500 remains 4800. The next Fed meeting will be quite interesting in our view, and we look forward to parsing the language as 2021 comes to a close. Looking ahead, we will plan to bring you our first 2022 valuation for the S&P on the first Friday of the New Year.
Warmest wishes and see you in the New Year!
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- November 2021)