For all the talk about inflation, stocks generally had a decent week and bonds gained/yields declined. While the bond market might be signaling a possible Fed misstep next year, stocks keyed off the third quarter earnings reports that came out this week. So far this earnings cycle, 82% of S&P 500 companies have beat estimates, a historically high number, as you can see below.
Earning growth is running at +34% y/y, surprising positively by +12%. Energy, Materials and Industrials are recording particularly strong earnings growth, with 5 of the remaining 8 sectors also seeing double-digit growth.
In terms of economic reports, there were a few key releases.
Home price appreciation doesn’t seem to be slowing down. The Case-Shiller was up +19.8% year-over-year in August, matching the record set in July.
Some of the sales data is starting to slow, but we will have to see if this feeds through into prices over the winter
Third Quarter Growth
US economic growth slowed considerably in the third quarter due to supply-chain disruptions, a resurgence of Covid-19 and slower spending on consumer goods. GDP grew at a + 2% annual rate, below the +2.7% expected, and far lower than the +6.7% pace in the second quarter.
The big drivers of the slowdown were:
– Lower consumer spending driven by the rise in Delta and supply shortages.
– Lower spending on long-lasting goods. This had a big impact. Durable goods spending fell -26% during the quarter, driven by a drop-off in auto sales. This alone pulled the headline GDP number down by -2.7%.
Both drags appear to be temporary. Estimates for fourth quarter growth are still looking pretty robust (granted, early estimates for the third quarter did as well!!).
Inflation and Wages
The final report showed two key measures of inflation picking up. The Fed’s favored inflation gauge hit the highest level since the 1990’s. But the report matched expectations – few thought this number would be low.
More surprising was the surge in the Employment Cost Index (ECI) that is embedded in the inflation report. The ECI increased +1.31% quarter-over-quarter, well above consensus expectations, and its fastest quarterly pace since 2001.
Of course, this is a good news/bad news story. Good news is people are making more, especially in lower-level services jobs. Bad news is that wage growth is a trigger for the Fed.
As an aside, the unintended consequence of service sector wage growth is automation. Just this week McDonalds, Walmart, and Starbucks were in the news regarding their work in this area.
Herding Cats – Washington DC Version
Maybe we are getting nearer to an agreement on President Biden’s infrastructure and social spending plans. Maybe?
This week a ‘framework’ was announced on the social spending side. The word framework seems a bit ambiguous, I know. It’s not an agreement because it seems key players in the Senate haven’t agreed to it. A negotiating framework then? President Biden will sing the framework’s clean energy credentials in Glasgow. But all of this could still blow-up, right? Politics is confusing.
Regardless, the spending proposal for the Build Back Better Act (is that really the best name they could come up with?) is coming in at roughly $1.8tn. Childcare and preschool spending plus clean energy appear to be the main winners, as you can see below.
This $1.8tn is meant to be in addition to the $1.2tn infrastructure bill the Senate has already passed (but the house hasn’t voted on yet).
On the revenue side, tax hikes are meant to raise $2tn over the next 10 years. The billionaire wealth tax (that isn’t a wealth tax) is out, but there’s a 15% corporate minimum tax and a 1% surcharge on share buybacks. Incomes above $10 million will be subject to a 5% levy and an additional 3% on incomes above $25 million. $400bn from better IRS enforcement – really? The figure (below) shows you the breakdown.
It goes without saying that none of this is firm yet. The political wrangling is playing out as we speak, but Goldman took a stab at what this would mean for fiscal spending over the next few years. Basically, all the spending is front-end loaded while the fiscal drag is in the out years. Shocker I know!! Under the current proposals we are looking at roughly 1% to 1.4% of fiscal stimulus (say $200bn to $280bn) in 2023 and slightly less in 2024.
Now whether any of this comes to fruition before the Thanksgiving break is anyone’s guess.
Charts We Found Interesting
1. Depressing COVID data from Russia.
2. When do value stocks outperform? At least historically, when inflation is above 4%.
3. A shortage of natural resources, a real estate slowdown, and electricity blackouts are probably all to blame.
4. Why all the shortages in the U.S.? We are simply buying a lot more stuff than we have historically while at the same time spending less on services.
5. No wonder real estate sales are starting to slow – homes are expensive!!
6. Tesla surpasses a $1tn market-cap. It is a staggering number and larger than all the other car companies combined.
7. Speaking of staggering – Elon Musk has made more money in the last 9 months than Warren Buffett has in 91 years.
Have a good weekend.
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