The S&P 500 stock index rose 3.8% last week to a new record high as fears of the Omicron variant of COVID- 19 subsided and the incoming economic readings remain encouraging. While the OECD leading indicator for the U.S. is suggesting a moderation in economic growth, it is still at an above-trend pace.

Last week’s business sentiment and labor market readings discussed below are also consistent with a healthy economic expansion. This should support further profit growth and ultimately stock prices in the coming year.

CEO Optimism at a Record High: The Business Roundtable CEO Economic Outlook Index shot up 10 points in the fourth quarter to 124, a record high, indicating rising business optimism about U.S. growth in the first half of next year. Hiring plans were the strongest since data started nearly two decades ago. Capital spending plans were the highest since the first quarter of 2018, and the second best ever. Sales expectations also strengthened. CEOs project 3.9% economic growth in 2022.

Labor Market Strength Continues: The JOLTS report showed the number of job openings increased 4.1% in October to 11.0 million, the second highest level ever, as labor demand continued to strengthen. Most industries posted gains, led by food service and accommodation, nondurable goods manufacturing, and education services. Among regions, the South posted the biggest increase in job openings.

The number of unemployed per job opening slid to a new record low of 0.67, as job openings continued to exceed the number of people looking to fill them. The ratio of the labor pool (which includes the unemployed and those who have not looked for work recently) to job openings dropped to 1.21, also a record low. Both indicators have fallen sharply in this recovery, indicating rapidly tightening labor market conditions.

The quit rate slipped to 2.8% from a record high 3.0% in the previous month, but continues to show high worker confidence, another sign of a tightening jobs market.

Initial claims for unemployment insurance is also consistent with a strong labor market with claims dropping 43,000 last week to 184,000, the lowest level since 1969, and well below the consensus of 229,000. The four-week average of claims, which fell 21,250 to 218,750, is now very close to its pre-recession level of around 215,000. This reflects continued tightening in labor market conditions and increased efforts by employers to hold on to their staff.

OECD CLIs Suggest a Moderation in Global Economic Growth: The OECD Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend, continue to suggest that economic growth in the OECD area as a whole may reach a peak in the coming months.

The latest CLIs reaffirm last month’s assessment which showed signs of a possible upcoming peak in the growth of economic activity in the United States, Japan, Germany and the United Kingdom. Similar signals have now emerged in Canada and the euro area as a whole.

Among major emerging-market economies, the CLIs continue to anticipate growth losing momentum in China. In India, the CLI indicates stable growth while in Brazil, the outlook continues to deteriorate with the CLI now contracting to below-trend levels. By contrast, the CLI for Russia continues to point to a steady increase in growth above long-term trends.

Federal Reserve in Focus This Week: Friday’s consumer prices report showed inflation pressures continued to mount in November, reflecting robust consumer demand and persistent shortages due to on-going supply- chain issues. The Consumer Price Index (CPI) increased 0.8%, or 6.8% on a year-over-year basis (the fastest pace since June 1982). These inflationary pressures will have all eyes on the Federal Reserve on Wednesday as they conclude a two-day meeting where policy makers will discuss accelerating the end of their bond purchase program. It is important to note that history shows that stock returns remain robust in the months leading up to and following the first interest rate increase, which the market now expects to occur mid-year 2022.

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