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.

Disclaimer

This report is provided for informational and educational purposes only and shall in no event be construed as an offer to sell or a solicitation of an offer to buy any securities or a recommendation for any strategy or to buy, sell, or hold any product. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. Employees of Janney Montgomery Scott LLC or its affiliates may, at times, release written or oral commentary, technical analysis, or trading strategies that differ from the opinions expressed here. The information described herein is taken from sources which we believe to be reliable, but the accuracy and completeness of such information is not guaranteed by us. The opinions expressed herein may be given only such weight as opinions warrant. This Firm, its officers, directors, employees, or members of their families may have positions in the securities mentioned and may make purchases or sales of such securities from time to time in the open market or otherwise and may sell to or buy from customers such securities on a principal basis. This report is the intellectual property of Janney Montgomery Scott LLC (Janney) and may not be reproduced, distributed, or published by any person for any purpose without Janney’s prior written consent. This presentation has been prepared by Janney Investment Strategy Group (ISG) and is to be used for informational purposes only. In no event should it be construed as a solicitation or offer to purchase or sell a security. Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with investing in stocks such as a loss of original capital or a decrease in the value of your investment. For additional information or questions, please consult with your Financial Advisor

About the author

For more information about Janney, please see Janney’s Relationship Summary (Form CRS) on www.janney.com/crs which details all material facts about the scope and terms of our relationship with you and any potential conflicts of interest.

To learn about the professional background, business practices, and conduct of FINRA member firms or their financial professionals, visit FINRA’s BrokerCheck website: http://brokercheck.finra.org/