Should you be selling?

This week proves that the stock market is never dull. From earnings reports to the political development of spending bills, each moment and seconds tilt investors to multiple angles of the economy: the labour health, the corporate earnings and socio-political spending dynamics. Before we explore the future trajectory, it is critical for us to take stock of the elements wrapping up the market’s movement and the possible path ahead.

Let’s get into the details.

A Brighter Labor Market

The October job report looks good on the surface. The pace of hiring has exceeded expectations as employers added 531,000 workers after lacklustre performance seen in August and September despite upward revision.

Gains in employment was pretty broad-based across various industries in the private sectors. This shows signs of improvement in a labour shortage, although insufficient to disrupt the delicate balance of slow pace tapering by the Fed. It is, therefore, a comforting figure and delivered a rally to the stock market.

The modest growing economy seems to be a preferred choice for investors as it leaves room for the Fed to allow the interest rate to remain low for a more extended period. As a result, the S&P 500 hit a new hight. This sense of reality was unimaginable in the early 2^nd half of the year when economists were predicting roaring jobs employment in a million.

For now, the goal is shifted. Labour force participation remains low. It sheds light on the supply of labour as an issue rather than the demand side. The number of people willing to enter the workforce continues to deviate from a large pool of open jobs to be filled. Pika World believes this is the central node of all stickier problems- the massive everything that is in shortage, the limitation to economic growth (recall that we are worried about slower economic growth), and the inability of companies to meet sales targets due to lack of inventories.

The result- higher prices for goods and services that appear to weigh on consumer confidence.

The missing Talents

The Labour force participation rate had remained at 61.6% and appeared to meet resistance as it had not climbed considerably ever since the economy crawled out of the lockdowns. The current level is the lowest since the 1970s, except for lockdown in 2020.

In October, those hired were already looking for work, and thus their headcount was already part of the labour force. As a result, the number of re-entrants fell to 2.21 million from 2.29 million in September.

Average hour earnings rise reflects the fundamental by-product of a tight labour market. Pay rose by another 0.4% in October, elevating the yearly increase to 4.9%. As a result, the unit labour cost, which economists often use to measure wage inflation, has increased by 5% in the third quarter compared to a year ago. Essentially, the measure is the amount of money businesses pay to produce a single unit of product such as an oven, a car or even a bottle of soap.

Isn’t Wage growth a Good Sign?

To some extent, wage growth is good for the economy as it boosts disposable income and leads to higher consumption. The cycle continues and is a robust engine in an economy where consumer spending accounts for 70% of the economy.

A problem arises when wage growth outpaces productivity growth and thus inducing consumer prices to go higher. Unfortunately, we are seeing weakening confidence that productivity growth will clamp down inflation since productivity growth has been slow, and companies are increasing prices of goods and services to protect profit margins.

With more stimulus ahead, anyone guess is that the labour market is operating forward of its long term capacity and the dynamics of wage induced inflation may stay longer and proved Uncle Powell’s to be right that inflation, while transitory, is here to last longer than a comfortable level.

Re-fuelling the Economy

When we thought the labour market was the final piece of good news for the week, the arrival of the passing of the bipartisan infrastructure bill on Saturday proved to be a rosy spur for the slowing economy.

The House had passed about $1 trillion bills to help improve public works that will result in the much-needed investment in roads, bridges and rail. It is a significant milestone as past administrations were not able to reach a consensus.

It will provide funding for federal infrastructure programs and provide an additional $550 billion in improving access for broadband internet services, water projects and improvement to the electrical grid.

President Biden’s goal has always been to Build America better by improving its competitiveness globally. So after Democrat’s recent loss in the Virginia race, this was a handsome victory and perhaps motivated more party members to get their act together to reach the finishing line.

Too Too Too, Next Stop, New Year Station

All is well; best epitomized in the week. The Fed had delivered the bond purchase tapering plan as expected and re-affirm to leave the interest rate at the current level. The Bank of England also made a surprising move to leave rates unchanged.

Finally, the October job report was a relief as private-sector hiring showed momentum. The much anticipated bipartisan infrastructure bill had reached its conclusion too. Likewise, our “Wildcard” – Covid is fading in the narrative as a market mover, and more good news on drugs to combat Covid-19 variants remain on track.

Pika World continues to see the equity market showing resilience in the light of the favourable tailwind as all three major indices break new high, with our favourite Russell 2000 hitting records as it was up by 6.1% for the week, a remarkable leap forward.

And when does the bull ends? We believe it is at the next station – New Year.

We hope you enjoy this read. Share it with your friends if you find it useful.

Pika World will be back with you next week!