Stocks Vacillating Near Highs

Stocks sank at the open but quickly turned around. At the moment, the Dow is down 85 points and the S&P 500 is flat. Those indexes remain within 2% of their all-time highs. Markets are suspended between what looks to be an incredible holiday shopping season, and rising inflation. Investors generally believe the Federal Reserve will be successful in its plan to remove stimulus without tanking the economy.

Weekly new filings for unemployment insurance benefits dropped to 199,000 last week, the lowest tally since 1969. The total number of continuing claims fell to 2,049,000. Economists will point out that holidays like Veterans Day and Thanksgiving tend to distort the numbers, but it’s getting really hard to ignore the fact that we’re approaching full employment. The 4-week moving average of new claims, which smooths out week-to-week volatility, is back down to pre-Covid levels. Layoffs are way down and the number of open job positions is at multi-decade highs.

Third quarter 2021 US economic growth—as measured by gross domestic product (GDP)—was revised slightly higher to 2.1%. The revision was driven by higher than expected consumer spending and inflation. GDP growth is typically calculated on a quarter-over-quarter, annualized basis and that’s weird. GDP for other countries is usually compared with the year-ago quarter. And on that basis US Q3 growth was 4.9%. Clearly, the steep economic recovery from Covid is mostly played out and growth rates are moderating toward more sustainable levels.

The Bureau of Economic Analysis released October’s Personal Income & Spending report today. Consumer spending surpassed economists’ expectations, growing 6.6% from year-ago levels. That’s very strong, and could possibly reflect some early holiday shopping. Incomes grew 5.9% during the month. The Federal Reserve’s preferred inflation gauge, “PCE Deflator,” accelerated to 5.0%, the fastest pace in decades. Stripping out energy & food, so-called “Core PCE” inflation accelerated to 4.1%. Bloomberg economists expect inflation to continue climbing “into early next year.” The Fed’s long-run target is 2% and it seems like investors are beginning to root for tighter monetary policy to keep inflation in check. Bloomberg’s chief US economist says, “the combination of higher inflation risks and consumer resiliency means that the likelihood of the Fed accelerating the pace of taper has increased substantially.”