Series of blockbuster economic reports nudges Wall Street ever forward

MANHATTAN (CN) — What began as a slow start to the week picked up considerably for investors when a slew of positive economic reports and a dovish Federal Reserve announcement goosed Wall Street.

By Friday, the three major U.S. indices had gained steam, building off of several weeks of gains, with the Dow Jones Industrial Average netting 510 points for the week. The S&P 500 increased for seven days in a row, closing on Friday at 4,697 points. The Nasdaq also gained ground, with the latter climbing over the 16,000-point mark briefly before settling just under that at 15,971 points.

Investors were spurred mainly by a jobs report issued Friday by the Bureau of Labor Statistics, which built on earlier good vibes from similar employment reports. The report noted the U.S. economy gained more than half a million jobs in October, a huge improvement over the 312,000-job gain seen the prior month.

“Today’s release flashed a green light for investors, signaling that any immediate concerns are unwarranted,” said Peter Essele, head of portfolio management at Commonwealth Financial Network, noting that gains were broad-based across industries.

Transportation and warehousing jobs increased by 54,000, retail trade gained 35,000 jobs, health care netted 37,000 jobs, and construction gained 44,000. The only weak sector was public education, which fell by 65,000 jobs, though experts note October is traditionally a strong month for hiring and that sector should right itself in November.

“If we continue to see strength in wage numbers going forward, it may catalyze the Fed to get more aggressive on taper and could pull forward hike expectations next year,” Cliff Hodge, chief investment officer at Cornerstone Wealth, said. He added that “one troubling data point in an otherwise pristine release” was that the labor-force participation rate has not changed much month over month and remains at 61.6%.

“What’s keeping so many people from coming back into the labor force now is we’re seeing trends in Covid cases falling and the advances of treatments and therapeutics," Hodge continued. “It’s a bit of a mystery.”

Voicing a similar concern was Michael Pearce, senior U.S. economist at Capital Economics, though he found the silver lining in that darker data point. “That suggests the sharp acceleration in wage growth in recent months has further to run,” he wrote in an investor’s note.

Earlier in the week, ADP also put out a positive jobs report, with its 517,000 private-sector jobs gained last month well above the estimates of around 400,000 jobs. Most of the jobs recovered were among large businesses, ADP found, which added 342,000 of the total job gain. Small- and mid-sized companies — or those with fewer than 50 or 500 workers, respectively — gained about 115,000 jobs each in October.

Among sectors, the services-providing industry fared the best, according to the payroll company, showing 458,000 new jobs, though the leisure/hospitality and professional/business sectors also did well, posting 185,000 jobs and 88 jobs, respectively.

“Bottom line, with more than 10 million job openings and the drop in both initial and continuing claims along with the daily labor shortage stories we keep hearing, we saw a nice job gain in October,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group.

Good news continued to roll in on the unemployment front, too, with the sixth straight week of declining claims. For the last week in October, the Labor Department reported just 269,000 initial claims filed, compared with 283,000 the prior week.

Wall Street also was hit with surprisingly good news from the Institute for Supply Management, whose services index posted 66.7 points, its highest level since the index was started in 1997 and nearly 5 points above what experts had predicted. The business-activity index also jumped 7.5 notches to hit nearly 70 points.

Among the other bright points from the index are that supplier deliveries gained almost 7 points to hit its second-highest point on record, and the “prices paid” recorded are up for all 18 of the sectors recorded and at the highest points they have been since 2005.

Some in the business community are preparing for a darker winter, though. A recent survey by the National Federation of Independent Business found that many small businesses are preparing for growing trouble during the colder months.

According to the survey of more than 600 small-business owners, about two-thirds of respondents say supply-chain disruptions are worse now than three months ago, and nine out of 10 owners think those disruptions will continue to negatively impact their businesses for at least the next five months. 

“Going into the busy holiday season, nearly half of small business owners who rely on holiday sales as a significant part of yearly revenue report that both the supply chain disruptions and the staffing shortage will impact their holiday sales,” Holly Wade, executive director of NFIB’s research center, said in a statement.

One thing that did not catch investors by surprise was the decision by the Federal Reserve to begin tapering its bond purchases starting mid-November. The central bank stated it would ease its purchases by $5 billion mortgage-backed securities and $10 billion in Treasuries per month. The Fed will not yet hike interest rates, though it is expected to do so sometime in 2022.

While the Fed noted its decision was based partially on elevated inflation, it maintains that it expects inflation will be short-lived. “Inflation is elevated, largely reflecting factors that are expected to be transitory,” the Fed wrote in its statement.

Investors were not caught off guard by the announcement, as many had predicted November as when the Fed would begin tapering, though the dovish language in the statement continued to fuel the bulls on Wall Street.

But investors will be watching inflation even more closely than before, wrote Tom Essaye of the Sevens Report, who added that if inflation expectations continue to rise “then markets will begin to price in an acceleration of tapering and a sooner-than-expected rate hike” that would cause market volatility next year.

“Put plainly, the fact that the Fed only committed to a $15 billion tapering for November and December leaves uncertainty about the pace for the remaining months in 2022, and that uncertainty will make markets nervous about jobs reports (if they’re too hot), inflation data (if it’s too hot), and growth data (if it’s too strong),” Essaye wrote.

Follow @NickRummell

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