The courage to press on regardless – regardless of whether we face calm seas or rough seas, and especially when the market storms howl around us – is the quintessential attribute of the successful investor. – John Bogle
After a rocky start to the week that saw the stock market plunge on Monday due to concerns over inflationary pressures and tighter monetary policy, the major averages rallied to end the week with gains. While rising bond yields caused the technology-heavy Nasdaq Composite Index to close virtually flat, both the Dow Jones Industrial Average and the S&P 500 Index averaged a gain of 1%. The 10-year Treasury yield rose to 1.60% as the price of oil and other raw materials jumped, sparking fears that inflation might be more permanent than the Federal Reserve had forecast. West Texas Intermediate crude oil rose above $80 per barrel for the first time since November 2014. Even more troubling was the prospect of the first ever default by the U.S. government on its debt obligations if Congress did not address the debt ceiling before October 18th. Fortunately, a short-term deal was reached to extend the federal government debt ceiling to December 3rd as Congress once again kicked the proverbial can down the road. The extension came at a time when Treasury Secretary Janet Yellen said that the economy could fall into a recession if Congress failed to raise the debt ceiling. In terms of economic data last week, the news was decidedly mixed as the September employment report showed that only 194,000 new jobs were created, well below the estimate of 500,000, while the unemployment rate fell to 4.8%. On the surface, this was a disappointing report but seasonal adjustments may have caused it to be weak and the August jobs report was actually revised up to 366,000 new jobs, compared to the initial read of only 235,000. Average hourly earnings were higher than expected and rose at the fastest annual pace since March 2007, fueling concerns that rising labor costs could contribute to higher inflation and reduce corporate profit margins. The weak job numbers were probably the result of the spread of the Delta variant of Covid-19, but whether or not it causes the Federal Reserve to delay tapering its monthly bond purchases remains to be seen.
Other employment-related data were better than expected as the ADP report showed that private payrolls rose by 568,000 in September, higher than the estimate of 425,000, and weekly jobless claims fell to 326,000, a drop of 38,000 and also better than forecast. August factory orders were slightly better than expected and the ISM services sector Purchasing Manager’s Index (PMI) was strong despite supply challenges.
For the week, the Dow Jones Industrial Average rose 1.2% to close at 34,746 while the S&P 500 Index added 0.8% to close at 4,391. The Nasdaq Composite Index gained just 0.1% to close at 14,579.
The September core producer price index (PPI), which excludes food and energy, is expected to show a moderate increase while the core consumer price index (CPI) is forecast to show a year-over-year increase of 4%, which would match the increase in August. September retail sales are expected to be flat after a strong report in August and the University of Michigan consumer sentiment index for October is expected to be a few points higher than in September.
The Federal Open Market Committee (FOMC) releases minutes from its monetary policy meeting in September.
Banks and other financial companies will kick off the third quarter earnings season and the most notable companies on the agenda include JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, PNC Financial, Goldman Sachs, Morgan Stanley and BlackRock. Other companies scheduled to report include UnitedHealth Group, Walgreens Boots Alliance and Delta Airlines.
Investors will get a better read on inflation this week with the release of the producer price index (PPI) and the consumer price index (CPI). Core inflation that excludes both energy and food prices is up 4% year over year, well above the Federal Reserve’s target rate of inflation of 2%. While the Fed has maintained that the recent spike in inflation will be transitory and will likely subside by next year, concerns have risen that higher prices may stick longer than anticipated. Last week the yield on the 10-year Treasury rose to 1.60%, a worrisome sign considering that the 10-year Treasury yield was only 1.30% at the beginning of September. Such a move higher sends jitters through the bond market as rising interest rates cause the value of fixed income securities to decline. (Bond prices and yields move in opposite directions). To deal with higher inflation, investors can invest in companies that have a history of increasing their dividends year in and year out as the increases typically exceed the rate of inflation. Granted, higher bond yields provide competition for dividend-paying stocks, but even though bond yields have risen, they still remain at historically low levels. Two exchange traded funds (ETFs) that invest in these type of companies are the Vanguard Dividend Appreciation ETF (VIG) and the SPDR S&P Dividend ETF (SDY). The Vanguard ETF tracks a specific index and invests in companies with a track record of increasing their dividends every year. It has a current yield of approximately 2%. The SPDR S&P Dividend ETF tracks the performance of the S&P High Yield Dividend Aristocrats Index, which invests in companies that have consistently increased their dividends for at least 20 consecutive years. It has a current distribution yield of about 2.8%. Both yields exceed that of the S&P 500 Index.