This week, we invite you to read our Q3 Market Commentary, which ties a bow on Q3 and articulates our outlook for the remainder of 2021 and into next year. We outline the primary fears hovering over markets (many of which we’ve addressed to some degree here), but we also present four major tailwinds that we believe can help bolster investor confidence and pull markets out of the doldrums — where they were for much of Q3. Investor pessimism has seized the reins from optimists, but that’s historically been a contrarian indicator, as one-year returns from the low point in sentiment tend to be positive.
In a nutshell: We view the current sluggishness in markets as a temporary pause; we believe cloudy skies will eventually clear, and economic fundamentals will pull markets higher in the months ahead.
Now, let’s dig into the week that was and the week ahead.
Wall Street wrap
A Debt Ceiling Debate Deferred: Lawmakers last week agreed to lift the debt ceiling by $480 billion and avoid default, but the fix is fleeting. The agreement simply kicks the can to December, when it’s estimated lawmakers will once again need to strike a deal to pay the nation’s tab. You may be feeling a little deja vu by late in November when this issue is once again expected to come to the fore.
The debt ceiling is one of several ongoing fiscal debates in Washington and is one of the primary concerns hanging over markets. If the U.S. were to default and fail to pay bondholders, it would send ripples through the financial system and risk tipping the nation into a recession, according to a warning from Treasury Secretary Janet Yellen. The U.S. technically defaulted on some of its Treasury bills back in 1979 following an unexpected failure in the word processing equipment used to prepare check schedules. Even though the fix was quick, yields initially jumped on Treasury bills and remained elevated for several months thereafter.
However, we think the odds are slim that lawmakers will push the debt ceiling debate over the precipice, as no elected official wants to shoulder the blame for triggering a recession. While the debt ceiling may be used for political leverage again in a few months, we anticipate the dust settling as it has in the past.
Therefore, we don’t think it’s wise for investors to sell based on Congressional bickering — whether it’s the debt ceiling or the ongoing spending bill talks. Markets may get jittery as negotiations spill into public view, but investors who sell on these headlines will likely miss the upside once deals are inevitably forged.
Looking Past the Jobs Report Headline: The week started with private payrolls with ADP indicating 568,000 workers were added September, well above the consensus of 430,000. Later in the week, Friday’s jobs report came in, and the headline number appeared to be a clunker, as 194,000 were added versus 500,000 expected. However, we aren’t concerned. Here’s why.
First, the private sector added 317,000 workers, but overall government employment was down 123,000. However, seasonal adjustments are likely are having an impact: There was big drawdown in the government, non-teacher education segment of 144,000 jobs. However, looking at the non-seasonally adjusted data, we were up 718,000 jobs. That’s quite a difference, but recall this is adjusted to prior years, and since we always hire a lot of people in September as schools open, this looks weak historically. But we really didn’t lose 144,000 jobs.
Also consider that August’s job additions were revised 131,000 to the upside (now 366,000 vs. 235,000). July also rose 38,000, from 1,053,000 to 1,091,000. In all, 169,000 total revisions to the plus side.
Extended unemployment benefits fully expired around the country, which may provide more momentum looking ahead. Of course, not everyone who came off those benefits found a job already, but I believe a majority will. Over the past few weeks, for example, the number of people who have come off total continuing claims (people who have already filed an initial claim and experienced a week of unemployment and then filed a continued claim to benefits) is over 6 million people. Common sense dictates they’ll need to find a job, and fortunately there are roughly 10 million available. It will take some time, but hiring looks poised to accelerate.
Growth Is Broad and Strong: Let’s revisit the most recent lSMs for September. The manufacturing ISM came in at 61.1 (anything above 50 indicates growth), which is quite strong, with new orders hitting an impressive 66.7. ISM services hit 61.9, which could be a sign COVID-19 is starting to fade a bit. New orders and inventory levels are beginning to grow, which could be a sign supply chains are healing. Improved supply chains, in turn, could help rein in inflation as businesses catch up with demand.
Last, but not least, 34 of 36 industries covered in the ISM survey reported growth again — broad and strong.
The week ahead
Clocking Inflation: We’re due for another heat check on inflation this week when CPI, Core CPI and producer prices for September hit newswires Wednesday. As we’ve stated for months now, inflation is one of the key concerns for markets right now, as there are worries price rises are accelerating and are proving more persistent than initially forecast. The worry is the Fed will be compelled to act sooner and more aggressively if inflation becomes a larger problem. As we outline in our Q3 commentary, we think a wave of hiring in fall and winter along with a shift in spending from goods to more services will keep prices in check. What’s more, this is a Fed that’s willing to let inflation run higher — and for some time — rather than risk doing too much (raising rates) and risk a backlash in markets or even a broader recession. In other words, regardless of the print this week, we don’t think it will fundamentally shift anything regarding the Fed’s policy stance.
Small Biz, Consumer Spend: We’ll get a taste of the trajectory for consumer spending preferences heading into Q4 when September retail sales and consumer sentiment reports are released on Friday. Consumer spending is a primary driver of GDP growth in the U.S. Lastly, we’ll get another installment of the NFIB small-business index. We’re looking (again) for signs that COVID-19 and labor market pressures are beginning to ease.
Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.
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As the chief investment officer at Northwestern Mutual Wealth Management Company, I guide the investment philosophy for individual retail investors. In my more than 25 years of investment experience, I have navigated investors through booms and busts, from the tech bubble of the late 1990s to the financial crisis of 2008-2009. An innate sense of investigative curiosity coupled with a healthy dose of natural skepticism help guide my ability to maintain a steady hand in the short term while also preserving a focus on long-term investment plans and financial goals.