The major U.S. stock indices broke a six-week winning streak last week. This is despite a pretty strong day on Friday. As we have pointed out several times, some backfilling is entirely appropriate given the move up we have seen since early October. The New York Fed released its Manufacturing Index for November yesterday. Manufacturing activity exceeded expectations and appears to be accelerating into year’s end. The same can be said for job growth. This data reflects the continued reflation of the U.S. economy and mirrors what we are seeing throughout developed countries around the world. Much of this may be attributed to increasing vaccination rates and the resulting opening of discretionary business. Third quarter earnings have also come in strong as public companies’ management appears to have been able to juice margins by “doing more with less”. This fact alone is a credit to human ingenuity during some really trying times over the past eighteen months.
Nothing is ever completely clear when it comes to investing – and today is no different. While we are seeing strong empirical evidence of growth in manufacturing, jobs and consumer demand, we are also witnessing some of the fastest price inflation on record. It has been argued that inflation pressures are transitory and due to supply chain imbalances as the world reopens. This may be true, but at some point, the cost of things begins to impact consumers’ decision making. It seems to me that we are getting to that point. People may just decide to wait on the new SUV, house or trip. When that becomes the decision, it has an impact on the economy. This is why we see the Federal Reserve and other central banks begin to hint at raising interest rates. They want to slow things down before the price increases cause an outright consumer revolt, which has a tendency to lead to recessions. Yesterday we saw two ex-members of the Fed come out and say rates are going to have to rise. The bond market picked up on this and we saw yields jump and prices fall across the entire yield curve.
It appears we may have some volatility going forward as investors weigh the good with the bad. Much like Goldilocks, it takes some testing to get it just right. We have talked about her over the years in this commentary and we will look again to see if she shows up. It sure is nice when she is around.
Key terms: A Goldilocks economy is not too hot or too cold but just right—to steal a line from the popular children’s story Goldilocks and the Three Bears. The term describes an ideal state for an economic system. In this perfect state, there is full employment, economic stability, and stable growth. The economy is not expanding or contracting by a large margin. (Source: Investopedia.com).