While inflationary pressures are proving to be stickier than the Federal Reserve’s initial transient assessment, we still see many economic attributes that provide a positive backdrop for stocks as we head into yearend.

Labor Market Progress Continues: Last week’s JOLTS report showed job openings edged down 1.7% in September to 10.4 million, but continued to hover near record highs, and exceeded the number of unemployed for the fifth consecutive month. The low number of unemployed per job opening is one measure of tight labor market conditions, which has translated into faster wage growth.

Hires slipped 0.6% to 6.5 million, but were also near historic highs (excluding the post-lockdown surge in 2020). Layoffs and discharges dipped slightly, close to a record low of 1.4 million. However, voluntary quits increased 3.8%, up in seven of the past eight months, to 4.4 million, a record level, indicating high worker confidence. Related to that, the quit rate (i.e., the ratio of voluntary quits to employment) moved up to a new record of 3.0%.

Consistent with an improving labor market, initial claims for unemployment insurance fell 4,000 last week, its sixth consecutive decline, to 267,000. This was slightly above the consensus of 265,000, but still the lowest level since March 2020.

Inflationary Pressures Weigh on Consumer: The Consumer Price Index (CPI) rose a broad-based 0.9% in October, more than double the previous month’s gain, and above the consensus of 0.6%. It was the biggest increase since June 2008 and is up 6.2% on a year-over-year basis.

The run-up in consumer prices and rising inflation expectations played a significant role in Friday’s weak Michigan Consumer Sentiment Index reading, which fell to its lowest level since November 2011.

While high inflation and weak consumer sentiment present a downside risk to the economy, large drops in consumer attitudes are not always associated with recession. In the current environment, continued employment and wage gains, excess savings, high asset valuations, favorable credit conditions, and low household debt service are counterweights to the decline in sentiment. Other key indicators we follow for turning points in the business cycle remain consistent with continued above-trend growth—as exemplified by the global business surveys discussed below.

Global Business Surveys Remain Encouraging: Global growth accelerated for a second month, according to the J.P.Morgan Global Composite Output Index (a timely global business survey including over 40 countries), providing a positive backdrop for stocks into yearend. The latest reading is above its long-term average and historically consistent with 3.7% annual economic growth.

Importantly, growth broadened among countries and sectors as the Delta impact waned. U.S. and Japanese growth accelerated, European growth slowed, China was steady, while other emerging markets were mixed. However, supply-chain issues, shortages, and higher prices continue to provide risks to the outlook.

Technicals are Painting a Positive Picture: In addition to fundamental economic data, we pay close attention to stock prices themselves for confirmation of our outlook—and we are encouraged by recent developments.

Small-cap stocks are starting to outperform with a major breakout above an eight-month trading range. Cyclical sectors are also breaking out to new year-to-date highs. Defensive sectors, including Utilities, Consumer Staples, Health Care, and Telecommunications, are all hitting relative strength lows. Consumer cyclicals are outperforming relative to defensives, with both the cap- and equal-weighted Discretionary vs. Staples ratios hitting new multi-year highs. Broad commodities remain bullish, including economically sensitive oil and copper. Breadth is also healthy as measured by advance/decline lines on many major averages, including the Russell 3000 and Nasdaq Composite. International stocks are also participating. Europe’s STOXX 50 is hitting highs last seen in 2008, and Japan’s TOPIX is building a bullish base and is at 21-year highs.


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