December 6, 2021 Dr. David Kelly, CFA | Chief Global Strategist for J.P. Morgan Funds
Revised 3Q21 Real GDP shows the economy expanded at a 2.1% annual rate in 3Q21, lower than the 2.6%consensus estimate and a sharp slowdown from robust gains earlier in the year. Weakness was led by a marked deceleration in consumer spending, growing just 1.7%, along with slower home building and a wider trade deficit. Weaker auto sales alone detracted significantly from GDP, and the rotation to services continued at a slower pace. While supply chain issues may persist well in 2022, recent data confirms economic momentum is beginning to pick up. The November ISM PMIs showed private sector growth remained robust with momentum picking up in services. Manufacturing was strong at 61.1, but services was the real standout coming in at 69.1, an all-time high.
November nonfarm payrolls rose by just 210K, well below consensus expectations for a 545K gain. On the other hand, the unemployment rate fell more than expected, declining 0.4 points to 4.2%, the lowest since the pandemic began. Employment in the household survey, in contrast to the payrolls survey, rose by a very strong 1.1M workers with a healthy 594K gain in the labor force. While the headline payrolls number was a significant miss, the overall narrative remains – economic momentum is very strong in spite of the economy rapidly running out of labor resources. This report may well strengthen the Fed’s resolve to consider a faster tapering of bond purchases when it meets in December.
The 3Q21 earnings season has been strong, with 463 companies reporting (90.5% of market cap). 81% of companies have beaten on earnings expectations and 68% have beaten on revenue expectations. Our current estimate for 3Q21 earnings is $52.12, which represents y/y EPS growth of 37.6% and a modest q/q growth of 0.2%. Earnings have held up better than we previously anticipated, as companies seem able to defend profit margins despite higher input prices. Oil (+73.4%) and the U.S. dollar (-1.4%) have also been decent tailwinds to earnings.
Inflation has far surpassed the FOMC’s 2% target, with the headline PCE price index rising 0.6% m/m and 5.0%y/y in October. The core PCE deflator also rose to 0.4% m/m and 4.1% y/y. The October CPI report showed consumer prices rose at their fastest pace since 1990 as supply chain issues showed little signs of abating. Headline CPI came in well above expectations at +0.9% m/m and +6.2% y/y, while Core CPI rose 0.6% m/m and 4.6% y/y. Further increases in shelter costs and an acceleration of inflation across a broad range of sectors point to the continued impact of supply chain shortages and a pickup in stickier components of inflation.
At its November meeting, the FOMC officially announced its plans to taper its net asset purchases by $15bn per month beginning in mid-November. The statement language was somewhat optimistic, acknowledging the slowdown in economic activity, but also that the delta wave is receding. Notably, the Fed appears to be putting a bigger emphasis on reaching maximum employment as a necessary condition for rate hikes. As such, it’s important to note that tapering is not tightening, and while purchases will slow in the months ahead, the balance sheet will continue to expand until settling at about $9tn by mid-2022.
The delta variant and global vaccine delays could slow the economic reopening.
Inflation could spike in the medium term.
Extremely accommodative monetary and fiscal policies could lead to a boom-bust recession.
U.S. equity investors may use earnings as a guide in a rising rate environment.
Fixed-income investors may underweight bonds and maintain short duration in a rising rate environment.
Long-term growth prospects, a falling dollar, and cyclicality support international equities.
WEEKLY MARKET RECAP:
The Week in Review
ISM manufacturing PMI at 61.1
ISM services PMI at 69.1, an all-time high
The Week Ahead
Thought of the Week
November nonfarm payrolls rose by just 210K, well below consensus expectations for a 545K gain. On the other hand, the unemployment rate fell more than expected, declining 0.4 points to 4.2%, the lowest since the pandemic began. Employment in the household survey, in contrast to the payrolls survey, rose by a very strong 1.1M workers with a healthy 594K gain in the labor force. While the headline payrolls number was a significant miss, the overall narrative remains –economic momentum is very strong in spite of the economy rapidly running out of labor resources.
Though disappointing, the headline job creation figure is of less importance at this point in the cycle. Much more critical is the labor force participation rate, which saw a healthy gain in November, edging up to 61.8% and breaking free from the
61.5%-61.7% range that it has been stuck at since mid-2020. Looking ahead, it is unlikely that the pre-pandemic participation rate of ~63% will be met anytime soon as the continued retirement of the Baby Boomer generation is driving a long-term secular decline in this statistic.
While markets may interpret November’s jobs report as suggesting that the labor market recovery is losing momentum, a broader view of these numbers and other recent data is that the pace of recovery remains very rapid and the report may well strengthen the Fed’s resolve to consider a faster tapering of bond purchases when it meets in mid-December.
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Data are as of December 6, 2021
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Chart of the Week: Source: Bureau of Labor Statistics, J.P. Morgan Asset Managemnet.
Thought of the week: Source: Bureau of Labor Statistics, J.P. Morgan Asset Managemnet.
Abbreviations: Cons. Sent.: University of Michigan Consumer Sentiment Index; CPI: Consumer Price Index; EIA: Energy Information Agency; FHFA HPI: - Federal Housing Finance Authority House Price Index; FOMC: Federal Open Market Committee; GDP: gross domestic product; HPI: Home Price Index; HMI: Housing Market Index; ISM Mfg. Index: Institute for Supply Management Manufacturing Index; PCE: Personal consumption expenditures; Philly Fed Survey: Philadelphia Fed Business Outlook Survey; PMI: Purchasing Managers' Manufacturing Index; PPI: Producer Price Index; SAAR: Seasonally Adjusted Annual Rate
Equity Price Levels and Returns: All returns represent total return for stated period. Index: S&P 500; provided by: Standard & Poor’s. Index: Dow Jones Industrial 30 (The Dow Jones is a price-weighted index composing of 30 widely-traded blue chip stocks.) ; provided by: S&P Dow Jones Indices LLC. Index: Russell 2000; provided by: Russell Investments. Index: Russell 1000 Growth; provided by: Russell Investments. Index: Russell 1000 Value; provided by: Russell Investments. Index: MSCI – EAFE; provided by: MSCI – gross official pricing. Index: MSCI – EM; provided by: MSCI –gross official pricing. Index: Nasdaq Composite; provided by: NASDAQ OMX Group.
MSCI EAFE is a Morgan Stanley Capital International Index that is designed to measure the performance of the developed stock markets of Europe, Australasia, and the Far East.
Bond Returns: All returns represent total return. Index: Barclays US Aggregate; provided by: Barclays Capital. Index: Barclays Investment Grade Credit; provided by: Barclays Capital. Index: Barclays Municipal Bond 10 Yr; provided by: Barclays Capital. Index: Barclays Capital High Yield Index; provided by: Barclays Capital.
Key Interest Rates: 2 Year Treasury, FactSet; 10 Year Treasury, FactSet; 30 Year Treasury, FactSet; 10 Year German Bund, FactSet. 3 Month LIBOR, British Bankers’ Association; 3 Month EURIBOR, European Banking Federation; 6 Month CD, Federal Reserve; 30 Year Mortgage, Mortgage Bankers Association (MBA); Prime Rate: Federal Reserve.
Commodities: Gold, FactSet; Crude Oil (WTI), FactSet; Gasoline, FactSet; Natural Gas, FactSet; Silver, FactSet; Copper, FactSet; Corn, FactSet. Bloomberg Commodity Index (BBG Idx), Bloomberg Finance L.P.
Currency: Dollar per Pound, FactSet; Dollar per Euro, FactSet; Yen per Dollar, FactSet.
S&P Index Characteristics: Dividend yield provided by FactSet Pricing database. Fwd. P/E is a bottom-up weighted harmonic average using First Call Mean estimates for the "Next 12 Months" (NTM) period. Market cap is a bottom-up weighted average based on share information from Compustat and price information from FactSet's Pricing database as provided by Standard & Poor's.
MSCI Index Characteristics: Dividend yield provided by FactSet Pricing database. Fwd. P/E is a bottom-up weighted harmonic average for the "Next 12 Months" (NTM) period. Market cap is a bottom- up weighted average based on share information from MSCI and Price information from FactSet's Pricing database as provided by MSCI.
Russell 1000 Value Index, Russell 1000 Growth Index, and Russell 2000 Index Characteristics: Trailing P/E is provided directly by Russell. Fwd. P/E is a bottom-up weighted harmonic average using First Call Mean estimates for the "Next 12 Months" (NTM) period. Market cap is a bottom-up weighted average based on share information from Compustat and price information from FactSet's Pricing database as provided by Russell.
Sector Returns: Sectors are based on the GICS methodology. Return data are calculated by FactSet using constituents and weights as provided by Standard & Poor’s. Returns are cumulative total return for stated period, including reinvestment of dividends.
Style Returns: Style box returns based on Russell Indexes with the exception of the Large-Cap Blend box, which reflects the S&P 500 Index. All values are cumulative total return for stated period including the reinvestment of dividends. The Index used from L to R, top to bottom are: Russell 1000 Value Index (Measures the performance of those Russell 1000 companies with lower price-to-book ratios and lower forecasted growth values), S&P 500 Index (Index represents the 500 Large Cap portion of the stock market, and is comprised of 500 stocks as selected by the S&P Index Committee), Russell 1000 Growth Index (Measures the performance of those Russell 1000 companies with higher price-to-book ratios and higher forecasted growth values), Russell Mid Cap Value Index (Measures the performance of those Russell Mid Cap companies with lower price-to-book ratios and lower forecasted growth values), Russell Mid Cap Index (The Russell Midcap Index includes the smallest 800 securities in the Russell 1000), Russell Mid Cap Growth Index (Measures the performance of those Russell Mid Cap companies with higher price-to-book ratios and higher forecasted growth values), Russell 2000 Value Index (Measures the performance of those Russell 2000 companies with lower price-to-book ratios and lower forecasted growth values), Russell 2000 Index (The Russell 2000 includes the smallest 2000 securities in the Russell 3000), Russell 2000 Growth Index (Measures the performance of those Russell 2000 companies with higher price-to-book ratios and higher forecasted growth values).
Past performance does not guarantee future results.