Highlights for This Week Include:

The November jobs report Is consistent with further economic growth while the NFIB small business survey showed optimism soaring, with the percent of owners expecting the economy to improve rising to the highest since June 2020.

Inflation remains stubbornly above the Federal Reserve’s 2.0% target, but high housing inflation finally looks to be trending lower and interest rate markets are signaling a very high probability of a 0.25% cut next week.

Major stock indexes continue to make new record highs, and we see positive market dynamics including broad participation across industries and stocks, especially those that benefit most from economic growth.

Historically, equity markets climb post-election into year-end. The positive economic and profit growth that we continue to see suggests that this election year-end trend can continue. See below for details.

November Jobs Report Remains Consistent with Further Economic Growth

Nonfarm payroll employment rose a better-than-expected 227,000 in November and was accompanied by a cumulative upward revision to the prior two months' data of +56,000. This reading implies a strong payback effect from October, which was disrupted by the hurricanes and the Boeing strike and signals a still-strong underlying pace of job gains. The data places the 3-month average at 173,000.

While the unemployment rate ticked up to 4.2% in November from 4.1% in October, it was led by new entrants and re-entrants into the labor force, which suggests further upside could be limited, especially with net immigration inflows likely to slow further.

Average hourly earnings (AHE) rose 0.4% in November and are up 4.0% from a year ago, which is outpacing consumer price inflation, leading to higher real earnings. This, combined with more hours worked, implies workers have more purchasing power. Higher household income, coupled with record high net worth (high home values and stock prices), suggests support for future consumer spending, the key driver of economic growth.

While the AHE pace remains elevated relative to the range that prevailed prior to the pandemic, it continues to slowly trend towards the 3.0-3.5% annualized rate that the Fed regards as consistent with its 2% inflation target.

Small Business Optimism Soars, Also Consistent with Further Economic Growth

The NFIB small business optimism survey soared in November, reaching a cycle high of 101.7 after 34 months of remaining below the 50-year average of 98. This is the highest reading since June 2021. The percent of owners expecting the economy to improve rose to the highest since June 2020. Of the 10 Optimism Index components, nine increased, none decreased, and one was unchanged. The NFIB noted that owners are hopeful for tax and regulation policies that favor strong economic growth as well as relief from inflationary pressures, and that small business owners are eager to expand their operations.

This was the first post-election business confidence survey and is a good proxy for middle income consumer confidence, which is correlated with broad consumer spending. The survey also showed business uncertainty fell from its record high, following pre-election jitters, also important for future business spending and hiring plans.

Inflation Remains Stubbornly Above the Federal Reserve’s 2.0% Target

While the November Consumer Price Index (CPI) showed sticky inflation, with the headline reading up 2.7% y/y and the core (excludes volatile food and energy) up 3.3% y/y, it was led by volatile categories (airline fares and lodging). Housing inflation, which has been stubbornly high, finally looks on track to move lower.

While Fed speakers repeated that the pace of rate cuts is likely to slow in future meetings amid firmer inflation prints, resilient activity, and little labor-market slack, they did not push back against market expectations of a December cut with interest rate markets assigning a very high probability of a 0.25% cut next week.

Thoughts on Recent Market Dynamics

We remain encouraged by the major U.S. stock indexes that continue to make record highs with positive market dynamics. We are seeing broad participation across industries, especially from stocks that benefit most from economic growth.

Historically, the non-investment grade (high yield) bond market has been a reliable indicator of the future direction of the economy and stock market. Importantly confirming the signal from stocks and recent economic readings, bonds continue to signal a very low probability of future defaults (defaults rise during economic recessions). The move lower in Treasury bond yields is also encouraging.

Equity markets typically climb post-election into year-end, and the positive economic and profit growth that we continue to see suggests that this year-end trend can continue this year. The pattern of recent quarters shows economic growth continues to drive better-than-expected earnings growth.

Communication Services (+23%), Technology (+22%), and Utilities (+19%) saw the best 3Q earnings growth. Energy (-29%), Materials (-11%), and Industrials (-4%) saw the worst. Full-year earnings growth for the S&P 500 is expected to be 9% in 2024, and early estimates for 2025 are for 13% y/y growth. Given the positive economic growth that we continue to see and the fact that corporate profits and future estimates remain sturdy, we remain positive on the economy and stocks.