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Key Points for the Week

  • The U.S. employment report was positive. Nonfarm payrolls increased 531,000 in October and previous months were revised higher.
  • The Federal Reserve announced the tapering of bond buying with purchases ending by July 2022. Bond buying is one of the methods that the Federal Reserve uses to Increase the money supply.
  • Strong corporate earnings, strengthening employment, and a supportive central bank propelled the S&P 500 to a record high.

Investor bullishness ticked higher last week on all four investor sentiment gauges tracked by Barron’s. Investor optimism may have been fanned by positive financial and economic news. For example, last week:

The jobs report was better than expected. Last week, the Bureau of Labor Statistics (BLS) reported that 531,000 new jobs were added in October, lowering the unemployment rate to 4.6%. In addition, the employment numbers for August and September were better than previously reported. The BLS Employment Diffusion Index measures the breadth of employment gains across the economy. It rose from 63.6 in September to 71.8 in October for private industry, and from 57.3 to 70 in manufacturing. The increase suggests that job gains were spread across diverse industries rather than concentrated in specific ones.

Central banks took a measured approach to policy changes. Investors who were concerned that central banks might pull back stimulus too soon were reassured last week. The U.S. Federal Reserve announced that it will begin tapering its bond buying program, and that the Federal Open Market Committee is not talking about raising rates yet, reported MarketWatch. In addition, the Bank of England surprised investors by not raising rates last week, reported Elliot Smith of CNBC. Tapering means that the Federal Reserve will reduce the amount of bonds that it buys each month. This reduction in bond purchases will reduce the expansion of the money supply. Many view this decision as appropriate as inflation continues at levels deemed too high.

Corporate earnings remained strong. Companies’ profits increased during the third quarter. So far, 81% of the companies in the Standard & Poor’s 500 Index have reported a positive earnings surprise, reported John Butters of FactSet. (A positive earnings surprise occurs when earnings are better than analysts expected.) So far, the blended earnings growth rate for the S&P 500 was 39.1 percent in the third quarter.

This Week in the Markets

After a couple weak monthly reports, U.S. employment picked up in October. The U.S. created 531,000 new jobs, beating expectations for 412,500. August and September were both revised higher by more than 100,000 jobs. Private payroll increased 604,000 while government payrolls shrank 73,000. Unemployment dipped from 4.8% to 4.6%.

The strong jobs report supports the Fed’s decision earlier in the week to begin tapering its bond purchases. The current $120 billion will be reduced by $15 billion each month, beginning in November and ending in July of next year.

The S&P 500 surged to a new record high, and the MSCI ACWI jumped as international stocks joined the U.S. rally. The Bloomberg U.S. Aggregate Bond Index increased slightly as well. Rates fell in response to the Fed’s comments suggesting it doesn’t expect to raise rates until late 2022 or early 2023.

Infrastructure Week

America’s infrastructure isn’t as sound as it once was. The American Society of Civil Engineers (ASCE) has been issuing a Report Card on America’s Infrastructure since 1998, and the best grade earned was a C in 1998.

Last week, the House of Representatives passed the Infrastructure Investment and Jobs Act (IIJA) with bipartisan support. The bill includes:

  • $110 billion to build and repair roads and bridges across the country, fund research and relieve congestion, reported Katie Lobosco and Tami Luhby of CNN.
  • $65 billion for power and water system improvements, including building new power lines, expanding renewable energy and upgrading water infrastructure.
  • $66 billion for passenger and freight rail systems.
  • $65 billion for broadband internet, particularly expanding broadband availability in rural areas and low-income communities.
  • $46 billion for flooding, coastal and climate resiliency that helps cities and states prepare for droughts, wildfires, floods and other climate issues, reported the ASCE.
  • $42 billion to update ports, waterways and airports.
  • $15 billion for electric vehicle charging stations and zero-emission school buses.

The IIJA will be funded by repurposing unspent coronavirus relief money and imposing tax-reporting requirements on cryptocurrencies. The infrastructure bill is expected to increase the deficit – the difference between the amount the United States spends and how much it takes in each year – by $250 to $350 billion over 10 years, depending on who is doing the math.

Big Week

Last week was a big week. Employment, the Fed, political trends, and COVID-19 all generated significant news that suggests the recovery from the pandemic is moving into a new phase that is less reliant on the Federal Reserve and more reliant on underlying growth trends.

The strong employment data and upward revisions in previous months showed the decline in COVID cases and the end of extra unemployment benefits are starting to spur people to return to work and fill many open positions. 531,000 new jobs aren’t the highest this year, but they are much improved from the original August and September reports.

Job gains in restaurants and related industries accounted for 27% of the increase in private sector jobs. Capitalism is causing many companies to work hard to solve the goods shortages and transportation issues plaguing some parts of the economy. Manufacturing jobs jumped 60,000, and transportation and warehousing added 54,000 new positions. The unemployment rate continued to grind steadily lower and reached 4.6%. The percentage of people out of work for more than 52 weeks dropped from 30% in May to 24.2% last month.

The Federal Reserve announced it would gradually taper or reduce its bond-buying program. The Fed has been purchasing $120 billion worth of bonds since March 2020. The program is designed to push long-term rates lower by buying up long-term government debt. Lower rates for government debt increase demand for corporate bonds or other areas of the market, providing liquidity for those needing to borrow additional funds or refinance existing debt. It also helps keep mortgage rates low, encouraging home building and allowing some borrowers to reduce interest payments. Given the strength in the employment data and other areas, the economy no longer needs bond buying to support growth.

Support from the fiscal side appears likely to provide its own boost as the bond buying goes away. The House of Representatives reprioritized the infrastructure bill in response to results from governors’ races in Virginia and New Jersey. The bill contains money for a wide range of projects and transportation infrastructure improvements. The bill includes money to expand charging stations that may help electronic vehicles become a better option for many drivers. Global leaders met in Scotland last week to discuss how to battle climate change.

Two new COVID breakthroughs will likely allow more reopening to occur. Children ages 5-11 are now receiving COVID shots, which will lead more families to reengage in a broader set of economic activity. Results from a therapeutic trial indicated an additional treatment may be approved that reduces hospitalization and serious illness for those who get COVID.

The key risk areas that have held the economy back look better than a week ago. Employment resumed its recovery, and the Fed removed some of its extraordinary measures. The president looks likely to sign a key infrastructure bill, and the effects of COVID are likely to continue to wane. Overall, this week was full of generally good news.

Did you Know? This Week in History

November 10, 1969: “Sesame Street” Debuts

On November 10, 1969, “Sesame Street,” a pioneering TV show that would teach generations of young children the alphabet and how to count, made its broadcast debut. “Sesame Street,” with its memorable theme song (“Can you tell me how to get/How to get to Sesame Street”), went on to become the most widely viewed children’s program in the world. It has aired in more than 120 countries.

The show was created Joan Ganz Cooney, a former documentary producer for public television. Cooney’s goal was to create programming for preschoolers that was both entertaining and educational. She also wanted to use TV as a way to help underprivileged 3- to 5- year-olds prepare for kindergarten. “Sesame Street” was set in a fictional New York neighborhood and included ethnically diverse characters and positive social messages.

From the show’s inception, one of its most-loved aspects has been a family of puppets known as Muppets. Joan Ganz Cooney hired puppeteer Jim Henson (1936-1990) to create a cast of characters that became Sesame Street institutions, including Bert and Ernie, Cookie Monster, Oscar the Grouch, Grover and Big Bird.

Weekly Focus

Thanksgiving. Bringing out the best in family dysfunction since 1863.

Anonymous

A new survey found that 80 percent of men claim they help cook Thanksgiving dinner. Which makes sense, when you hear them consider saying ‘that smells good’ to be helping.

Jimmy Fallon, Comedian and Television Host

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