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Markets push higher even as earnings start to dip

Staffing shortages, production bottlenecks have investors worried bull market may end soon. But that hasn’t stopped Wall Street from setting new records.

MANHATTAN (CN) — Investors kept the bull market rolling this week, with two out of the three major indices setting new records even as experts predict supply bottlenecks and labor shortages may persist into 2022.

By the week’s end, the S&P 500 hit a new high mark on Thursday, at 4,549 points, while it gained 73 points for the week. The Dow Jones Industrial Average similarly notched a new record at 35,677 points, a 383-point weekly gain. The Nasdaq failed to set a new record but still performed well, increasing 193 points for the week.

Positive corporate earnings helped spur investors’ bullishness last week, and they did so again for a large chunk this week, as well.

“Earnings kept rolling in, and although estimates were lowered throughout September, the number of beats is consistent with prior, record-breaking quarters,” wrote James Vogt of Tower Bridge Advisors. “No two markets are exactly alike [though], and this period is certainly unlike anything we have ever seen before. Who knows when consumers’ and businesses’ excess capital wears off and the need for adding debt comes back.”

The S&P 500’s high followed strong earnings reports from Tesla, HP Inc. and Proctor & Gamble. Even American Airlines, which has suffered for the better part of a year due to the Covid-19 pandemic, reported earnings that beat investor predictions with a net profit of $169 million during the third quarter, though the airline company received nearly $1 billion in federal support.  

One company stood out as an outlier: IBM. The computing and software giant posted a meager 0.3% increase in quarterly revenue, far below what analysts had expected, while net income fell 33% year over year. CEO Arvind Krishna told shareholders the company fell short of expectations, but noted with the separation of its Kyndryl business next month that it is taking “the next step in our evolution as a platform-centric hybrid cloud and AI company.”

“We believe that the stock market has more to climb in this bull market and that some of the Covid headwinds are receding, even as inflation increasingly becomes a headwind, because many companies continue to have pricing power, which should preserve corporate profits,” said Chris Zaccarelli, chief investment officer at the Independent Advisor Alliance.

Still, some worry the labor shortage and supply bottleneck headwinds could start to mute the market.

According to IHS Markit, which surveys manufacturing, bottlenecks have continued. The group’s October PMI report shows the softest rise in factory production since July 2020. This month also has seen a record increase in backlogs of work, with companies struggling to meet demand.

The survey noted that raw material prices have increased at a record pace, which has fed higher prices at the factory gate and spilled over into service sector prices.

“The problems for manufacturing are likely to be longer lasting with supply chain strains unlikely to ease anytime soon,” wrote James Knightley, chief international economist at ING. “Moreover, surging freight and energy costs are adding to the problems for the sector and will add to cost pressures. With demand so strong, manufacturers have pricing power and this will contribute to ongoing elevated consumer price inflation through 2022.”

Knightley said the 1.3% month-over-month decline in industrial production was a shock to some experts, who expected a minor gain. He noted drops in motor vehicles and related parts due to the semi-conductor chip shortages, and weather-related disruptions to utilities and mining.

Labor shortages — exacerbated by strikes by about 100,000 workers across the country, dubbed by some as “Striketober” — has some experts worried that a wage-price spiral could form.

“All the elements are in place for the initial burst of transitory price inflation to develop into a sustained wage-price spiral,” wrote Paul Ashworth, chief North American economist at Capital Economics. “The conventional wisdom was that such a spiral couldn’t develop rapidly in a modern economy, not with flexible labor markets and competitive product markets.”

However, not all is bad in the labor market. Once again, unemployment claims fell, this time to the tune of 290,000 claims for the week ending Oct. 16. That is 6,000 less than the revised number of 296,000 claims the prior week, and the fourth straight week claims have fallen.

As the special Covid-related unemployment programs dry up, so, too, have related claims, with initial Pandemic Unemployment Assistance claims falling to just 2,000 for the week ending Oct. 9. All told, the termination of federal emergency benefits have accounted for more than 95% of the decline in the last four weeks, experts say.

Tom Essaye of the Sevens Report says the last two weeks show employment is back to “normal” levels for a regular economy, noting it will push the Federal Reserve to begin tapering next month and could even accelerate the central bank’s plans.

“In fact, if claims continue to fall and get down towards 250k, then markets will start to price in the possibility that the Fed could more aggressively taper QE and even pull forward rate hikes, because with inflation as high as it is, a rapidly improving labor market is a potential catalyst for the Fed to get more aggressive in removing accommodation,” Essaye wrote.

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