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Key Points for the Week

  • U.S. companies added only 210,000 jobs compared to expectations of 530,000.
  • Households indicated job creation remained robust. A trend toward more self-employment and contract work helped reduce unemployment to 4.2%.
  • The Federal Reserve signaled inflation risk is higher than expected and suggested it may taper bond purchases more rapidly than expected.

Last week, employment and manufacturing data confirmed that the United States economy continued to strengthen in November, but positive economic news was overshadowed by investors’ concerns about the spread of coronavirus and Federal Reserve policy.

More Americans were working. The Bureau of Labor Statistics (BLS) reported that unemployment dropped to 4.2 percent in November – a level the country wasn’t expected to achieve before 2024, according to Eli Rosenberg of The Washington Post. The labor force participation rate improved, too, meaning that more people are returning to work.

Fewer new jobs were created than analysts expected, but that wasn’t surprising given the BLS’ track record during the pandemic. From June through September, it underestimated employment gains by 626,000, according to Andrew Van Dam of The Washington Post. In the latest report, the BLS revised October’s numbers to be higher by 15,000.

Manufacturing strengthened. The manufacturing industry made gains in November, too. The Institute for Supply Management Purchasing Managers’ Index (PMI) came in at 61.1 for November. The reading for new orders, which measure future demand, was 61.5. “A [PMI] level of 50 indicates that the manufacturing economy is growing. Above 60 is a very strong level,” reported Allen Root of Barron’s.

Positive economic data didn’t inspire investors last week, though. That may be because economic data reflects what has happened in the past. Investors are more concerned about what may happen in the future and how markets may be affected. As a result, investors focused on:

The Omicron variant spread. Last week, a new variant of the coronavirus spread in the U.S. states. Initial indications suggest Omicron may be milder than previous variants, reported Deena Beasley of Reuters. However, that did not quell investors’ concerns. Josh Nathan-Kazis of Barron’s reported:

“Fearing new lockdowns that had been ruled out as recently as a week ago, investors are at times panic-trading based on anecdotes and passing comments by CEOs. The S&P 500 index moved more than 1% nearly every day this week, gyrating up and down on new guesses about what Omicron will mean for the world.”

Federal Reserve policy changes. Investors pondered Fed Chair Jerome Powell’s testimony before the Senate Banking Committee. Powell “…reiterated that he and fellow policymakers will consider at their upcoming meeting a faster wind-down to the Fed's bond-buying program, a move widely seen as opening the door to earlier interest rates hikes,” reported Jonnelle Marte and Lindsay Dunsmuir of Reuters. Historically, rising interest rates have slowed economic growth.

This Week in the Markets

The U.S. employment report continued to send contradictory signals as the fallout from the Omicron variant began to show up in data releases. The jobs report, based on research from a few weeks ago, indicated the U.S. only added 210,000 jobs which was lower than the forecasted gains of 530,000. The household survey showed much stronger gains. Employment rose 1.1 million and the unemployment rate dropped to 4.2%. The household report includes self-employed workers, which the employment report does not. Average hourly earnings grew 0.3% in October and have increased 4.8% in the last year but hourly earnings have not kept up with inflation.

Federal Reserve Chair Jerome Powell announced that inflation is no longer transitory and in need of action. As a result, he indicated that the Fed may taper its bond purchases faster and raise rates sooner than the market expected.

The spreading Omicron variant and concerns over job growth and inflation pushed stocks lower. The S&P 500 and MSCI ACWI both fell, while the Bloomberg U.S. Aggregate Bond Index rallied last week. The November Consumer Price index on Friday will provide the next major look at how quickly prices for goods are increasing.

Consequences

Labor and goods shortages have been key inhibitors to a full economic recovery. As investors get ready for the next inflation update, the consequences of those shortages are starting to bear out on the employment market, monetary policy, and market volatility.

Job creation news was mixed but generally positive. The establishment survey, which includes business reporting, indicated jobs grew by only 210,000 and missed expectations for gains of 530,000. The combined estimated job growth in September and October was increased by 82,000, indicating overall that job growth remains strong.

The household survey, which includes sole proprietors and contract labor, showed job growth was much stronger. Employment rose a staggering 1.1 million, and the number of permanently unemployed shrank by 200,000. The data supports anecdotal evidence that people are starting their own companies.

In addition to the job gains, higher wages have been a major consequence of increased demand. Average hourly earnings have increased 4.8% in the last year. The steady wage gains through most of this year are enticing more people back into the labor force. As the household survey data shows, unemployment dropped to 4.2%, and 600,000 people entered or reentered the labor force.

The shortages have also contributed to higher prices, and a possible consequence is the Fed may move faster than expected. Less than a month after the Fed announced plans to taper its purchasing of $120 billion of high-quality bonds each month, Fed Chair Jerome Powell stated that it’s possible the Fed may consider accelerating the tapering plans to end the program a few months earlier. Fast-tracking the taper would allow the Fed to increase short-term interest rates sooner, which is its primary tool to fight inflation. If the Fed were to end the purchasing program early, the first interest rate hike could come as soon as mid-year 2022. The possible policy change indicates a shift in concern from one part of the Fed’s dual mandate to the other — from unemployment to inflation.

A supportive Fed has been a key ingredient to the strong market since the COVID-led decline in early 2020. The news the Fed may move more quickly, coupled with the risk from the Omicron variant, had its own consequence, which was an increase in stock market volatility. Last week the S&P 500 declined by more than 1% for two days and had a total of four moves of more than 1%. The last time the S&P 500 had four 1% daily moves in the same week was May.

Actions have consequences. Investment markets are starting to face the consequences of COVID-19 and the policy responses to fight the pandemic. This week’s Consumer Price Index data will provide further guidance as to how much pressure the Fed faces to act more quickly. After a few quiet months, uncertainty seems to be rising.

Build Back Better Act (BBBA) Tax Changes

The US House of Representatives has passed the Build Back Better Act (BBBA). The Bill has moved to the Senate, which is expected to make changes to the Bill. However, we have received inquiries as to what tax changes the Bill proposes:

  • Surtax on multi-millionaires: A new tax 5% when Adjusted Gross income is above $10,000,000. The surtax rises to 8% when Adjusted Gross Income is above $25,000,000. Please note that this is a tax on income as opposed to a tax based upon taxable income.
  • Expanding income subject to the ACA tax: The current tax law includes a 3.8% ACA tax on earned income and investment income. The mechanics for calculating this tax are different but there are certain types of income not subject to this tax. The list of excluded income will be reduced subjecting more income to this tax. For example, this tax will now affect business owners that are taxed as S-Corporations.
  • Corporate minimum tax: Companies have multiple acceptable methods of reporting income. Many public companies use one set of accounting standards to determine “book income” which tends to present the highest possible income and a different set of standards to report “taxable income”, which tends to report the lowest possible income. The difference is usually related to the timing of recognizing income and expenses. Th bill creates a new tax of 15% on “book income”.
  • Stock Buybacks: The Bill will now impose a 1% transaction tax on the value of any stock repurchased by publicly traded U.S Corporations.
  • Increase in the SALT limit: State and Local Income taxes are deductible as an itemized deduction. Under current law, this deduction is capped at $10,000. This cap would be raised to $80,000 and would be retroactive to 2021.
  • Limits on IRA and Roth IRA contributions: Taxpayers whose IRA and other retirement account values exceed $10,000, 000, would not be allowed to contribute to either an IRA or Roth IRA.
  • Conversions from traditional retirement accounts to Roth accounts will not be allowed for taxpayers whose adjusted gross income exceeds $400,000 (single or $450,000 (joint).
  • Pension Plan reporting: Pension plan administrators would now need to report to IRS the names and taxpayer identification numbers of any plan participant that has $2,500,000 or more in the plan.
  • A new IRA RMD: Currently taxpayers age 72 or older must tax a Required Minimum Distribution from their traditional IRA and some other retirement plans. This bill adds a new category of taxpayers that would be subject to required distributions and a new calculation for those taxpayers. If the year-end value of the IRA and other defined contribution plans exceed $10,000,000 then the following year’s required distribution would be 50% by which this value exceeds $10,000,000. If the value of these accounts exceeds $20,000,000 then the Required Distribution would need to come from the Roth IRA first.
  • Renewable Credits: New and expanded credits for Electric Vehicles and hybrids.
  • Foreign Tax Credit: New formulas for calculating and changing the credit from an aggregate to a per country credit. This would lower the potential credit by not allowing high tax countries to be offset by low tax countries.
  • Eliminates a tax provision that allows for after tax rollovers from qualified Plans in certain circumstances

Did you Know? This Week in History

December 6, 1884: The Washington Monument is Completed

On December 6, 1884, in Washington, D.C., workers placed a nine-inch aluminum pyramid atop a tower of white marble, completing the construction of an impressive monument to the city’s namesake and the nation’s first president, George Washington. As early as 1783, the infant U.S. Congress decided that a statue of George Washington, the great Revolutionary War general, should be placed near the site of the new Congressional building, wherever it might be. After then-President Washington asked him to lay out a new federal capital on the Potomac River in 1791, architect Pierre L’Enfant left a place for the statue at the western end of the sweeping National Mall (near the monument’s present location).

Made of some 36,000 blocks of marble and granite stacked 555 feet in the air, the monument was the tallest structure in the world at the time of its completion in December 1884. In the six months following the dedication ceremony, over 10,000 people climbed the nearly 900 steps to the top of the Washington Monument. Today, an elevator makes the trip far easier, and more than 800,000 people visit the monument each year. A city law passed in 1910 restricted the height of new buildings to ensure that the monument will remain the tallest structure in Washington, D.C., a fitting tribute to the man known as the “Father of His Country.”

Weekly Focus

The journey of a thousand miles begins with one step.

Lao Tzu, Chinese Philosopher

Never let the fear of striking out keep you from playing the game.

Babe Ruth, American Baseball Player