Jobs rebound as the labor market recovery remains intact! As an aside, it is certainly nice to see a strong jobs print (with upward revisions) after some September softness. Of course, the domestic economy is still missing quite a few folks in the labor force (7.4M unemployed today vs 5.7M pre-pandemic), but the numbers are improving and that is a positive thing for all Americans. So, without further ado here are your October jobs figures. Payrolls increased by 531K last month as the official unemployment rate ticked down 0.2% to 4.6% (U6 is still elevated at 8.3%). Furthermore, BLS revised its numbers from September AND August to account for an additional 235,000 jobs. The private sector shouldered the load last month adding 604K new workers, whereas government hiring stagnated with payrolls shrinking by 73K. Labor force participation is the trouble spot as it was unchanged MoM at 61.6%. October did bring good news for those in the workforce as hourly earnings rose 0.4%. Incidentally, that increase in earnings also happened to outpace core inflation last month (more on that to follow). All in all this is a very good report!
Corroborating October’s labor market report, the US economy is also off to a strong start in the final quarter of 2021. Last month’s ISM manufacturing and nonmanufacturing readings indicate continued expansion (61.1 and 61.9, respectively). Moreover, US consumers seem to have gotten a bit of their mojo back with new home sales jumping 14.0% and personal spending printing a 0.6% MoM increase. October core durable goods orders ticked up nicely to the tune of 0.4%. Those are certainly solid underpinnings to start the fourth quarter! Of course, construction spending was a soft spot as it flatlined (0.0% growth) relative to the prior month.
Inflation figures are still running quite hot by any YoY comparison, BUT there has been some moderation of late. October core CPI and PPI each increased 0.2% MoM. This follows the divergence between CPI and PPI that we discussed last month. So, things aren’t looking exactly “red hot” from an inflation perspective as we march toward yearend. In fact, Chairman Powell and the FOMC tweaked their language in the most recent Fed statement in an attempt to recalibrate the term “transitory” with regard to inflation. Simply put the economic backdrop certainly seems to justify a taper of asset purchases on the part of the Federal Reserve; however, anything beyond that (i.e. rate increases) is an open question. In our view the data are simply not strong enough to justify an imminent increase in short-term rates and not weak enough to justify the continuation of the Fed’s $120B monthly purchase program. We think Powell has it right for now… and the Fed’s balance sheet won’t be getting smaller anytime soon by the way! It is currently valued just shy of $8.6T.
On the corporate front, 3Q earnings certainly have not disappointed and we are relatively optimistic on what the fourth quarter will bring. As of today, S&P 500 operating profits appear to be tracking for a 40%+ improvement over last year. This is a very impressive feat! However, the “forwards” are certainly quite important and we are moving our fair value estimate for the S&P to 4800 from 4725 with a couple of months left on the clock in 2021. 2022 will not have the benefit of an “easy comp” year, but looking through our spyglass, we do feel confident in the prospect of fairly strong earnings growth (despite the current inflationary backdrop). We must also note that the dynamics underpinning financial markets are changing and will (in all likelihood) continue to change through the end of next year and beyond as supply chain issues, labor shortages, geopolitical strains, interest rate adjustments, etc… manifest themselves within the context of a broader global economic rebound. That “recovery” is still underway, and there remains plenty of work to be done on the economic front. Our current range for next year’s S&P 500 earnings growth is 8- 10%-- not bad by historical standards. Of course, the multiple is the hardest part! So, in light of that we look forward to more number crunching as we head into the holidays.
Cheers and we wish you all a very happy Thanksgiving!
Market Outlook: Neutral USD, Neutral Duration, Neutral Equities
News Release: Bureau of Labor Statistics (The Employment Situation- October 2021)