Stocks rose last week after Senate lawmakers struck a deal for a short-term extension to the debt limit on Thursday.

This allowed the market to focus on economic conditions, which are the major driver of stock prices. Last week’s service sector business survey, CEO confidence reading, and even Friday’s weaker-than-expected jobs report are all consistent with a fundamentally sound economy that should support further corporate profitability and ultimately stock performance.

Earnings season kicks off with many major banks reporting this week, which will provide additional signals for the strength and outlook of the economy. Investors will also be focused on the impact that supply chain disruptions, labor shortages, and inflationary pressures are having on profits.

Business Surveys Remain Encouraging: The beginning of every month brings important business sentiment readings that correlate with economic conditions. These surveys continue to signal healthy economic conditions, with the ISM Services PMI ticking up in September. While off its cycle high reached in May, the PMI is well above the 12-month average in February 2020, at the onset of the last recession. It is historically consistent with above- trend economic expansion. The combined latest readings of the ISM Manufacturing and Services PMIs are consistent with 5.0% annualized economic growth, indicating a robust recovery from the pandemic.

CEOs Remain Confident: While the Conference Board’s CEO Confidence Index showed some moderation from a record high in the previous quarter, it remains consistent with a healthy economic outlook. The overall index remained near its highest level since the first quarter of 2017, and well above the historical average, as executives continue to perceive the current and expected economic environment as broadly favorable for growth.

The trend of the CEO Confidence Index suggests continued strong capital expenditure growth through the first half of 2022. Labor market shortages reportedly intensified. While hiring plans for the next 12 months picked up, nearly 3/4 of CEOs reported difficulty filling open positions, up from 57% in the previous quarter. As a result, wage growth expectations rose sharply, with 66% of CEOs planning to raise wages by 3% or more over the coming year, up from 37% of CEOs expecting that in the second quarter.

Labor Market Continues to Heal: While Friday’s payroll report showed nonfarm payrolls expanded by a less than-expected 194,000 in September, we continue to see a bright outlook for the labor market. The prior two months were revised up by a total of 169,000, so the September shortfall doesn’t seem quite as bad. Additionally, the average work week climbed 0.2 hours to 34.8 hours, and remains higher than the previous two cycles. Each 0.1 hour is equivalent to adding 360,000 jobs.

Average hourly earnings jumped an above-consensus 0.6%, which suggests tight labor market conditions. The unemployment rate surprised to the downside, dropping to 4.8% from 5.2%. Thursday’s jobless claims were also consistent with an improving labor market with initial claims dropping 38,000 to 326,000, the biggest decline since late June.

We continue to expect further improvement in the labor market in the coming months and view the recent disappointing job growth as a labor-supply, rather than demand, issue. There are nearly 11 million job openings, but only 7.7 million unemployed. Business confidence is elevated, with plans to hire at a record high. In addition, the employment diffusion index remains above 60%, which is an important driver of labor-force participation and wage gains.

Corporate Bonds Sending Positive Signal: We are always looking for confirming signals of our outlook and we remain encouraged by the positive signal coming from the corporate bond market. Corporate bond spreads are the amount of yield above safe Treasury bond yields that investors require for taking on corporate default risk. While investment-grade and high-yield spreads blew out during the pandemic, at 0.88% and 3.60% today, they are below their pre-pandemic levels of 1.07% and 4.15%, respectively. This implies a positive outlook for the economy and corporate cash flows, which are needed for interest and debt payments.

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