by Louis Navellier
October 12, 2021
As inflation continues to heat up and push China and other nations deeper into recession, the U.S. remains an oasis to the world. The port bottlenecks and supply chain glitches persist, but at least the U.S. is not expected to be crippled by high coal and natural gas prices that are now hindering China and Europe.
As we head into the fourth quarter, much of the uncertainty plaguing financial markets is starting to dissipate. The main thing that continues to frustrate investors is inflation. The bottom line is that the U.S. economy remains an oasis compared to other world markets. This is one reason why the U.S. dollar is near a one-year high. Not only does the U.S. have positive economic growth, but we also have higher interest rates and continue to attract foreign capital, which may keep Treasury yields artificially low.
One of the tragedies of the port bottlenecks is that a pipeline break in the ocean off Southern California appears to have been caused by a ship’s anchor, since 4,000 feet of the pipeline was moved after being “pulled like a bowstring.” As a result, some of the big container ships sitting offshore are being investigated by the U.S. Coast Guard as possibly being the cause of the pipeline break.
The Fed is blaming inflation on the port bottlenecks, but they still say that inflation is “transitory.” It is important to remember that slightly over a year ago, the U.S. economy was characterized by deflation, which the Fed certainly “fixed” with its easy money policies, ultralow interest rates, and quantitative easing. The only problem is that the Fed seemingly “overshot” its 2% inflation target by a wide margin.
The Fed’s favorite inflation indicator, the Personal Consumption Expenditures (PCE) index, is now running at a 4.3% pace over the last 12 months – the highest rate in 31 years. The core PCE, excluding food and energy, is also up 3.6% in the last 12 months. Fed Chair Jerome Powell told the House of Representatives that the surge in prices this year “is a function of supply-side bottlenecks over which we have no control,” but Powell also spooked the stock market when he said the Fed faces a “difficult trade-off” if inflation does not moderate, while adding that “our expectation is that inflation will come down.”
The other big news last week was a seven-hour outage on Facebook, Instagram, WhatsApp, and other social media services on Monday – and another 2-hour outage on Friday. A Facebook whistleblower that appeared on 60 Minutes Sunday evening was testifying in front of Congress Monday, so the outage was an odd coincidence. Facebook apologized, and its stock was a drag on NASDAQ. Facebook has a lot of allies in Congress, so it will be interesting to see what, if any, regulatory action will be taken against Facebook. I suspect that, due to the First Amendment, very little action will be taken against Facebook.
Navellier & Associates owns Facebook (FB) in a few managed accounts. Louis Navellier does not personally own Facebook (FB)
Last Week’s Economic Indicators Were “Mixed” – But Still Better Than Other Nations
The Institute of Supply Management (ISM) on Tuesday announced that its non-manufacturing (service) index rose to 61.9 in September, up slightly from 61.7 in August. This was the 16th straight month that the services index has been above 50, signaling growth in the service sector. All 17 service industries that ISM surveyed in September reported growth, which bodes well for continued strong GDP growth.
The Commerce Department on Tuesday announced that the trade deficit widened to a record $73.3 billion in August, up from $70.3 billion in July. Exports rose 0.5% to $213.7 billion, while imports surged 1.4% to $287 billion. Put together, that’s $500 billion in trade in August, a $6 trillion annual rate, which is a bullish sign by itself;, but the larger the trade deficit, the more economists tend to cut GDP estimates. The Atlanta Fed, for instance, lowered its third-quarter GDP estimate Tuesday to an annual pace of 1.3%, down from its previous estimate of 2.3%. The trade deficit and weaker than expected home sales were the primary culprits behind the downward GDP revision. Overall, the U.S. seems constrained by ongoing port bottlenecks, which are getting worse as retailers strive to stock up on merchandise for the holidays.
The Commerce Department also reported that consumer spending rose 0.8% in August, up sharply from a 0.1% contraction in July. At the same time, personal income only rose 0.2% in August, so consumers spent more than they earned, meaning the savings rate declined a bit, so the consumer remains healthy.
On Wednesday, ADP reported that private payrolls rose by 568,000 in September, led by large businesses (i.e., those with over 500 employees), which created 390,000 jobs. Economists expected 450,000 new private payroll jobs, so the ADP report was a significant surprise. Naturally, this created high expectations for the Labor Department’s Friday payroll report. Additionally, since companies still have over 10 million job postings, employment growth should steadily rise – as long as workers will apply for those jobs!
The Labor Department announced on Thursday that initial unemployment claims declined to 326,000 in the latest week, compared to a revised 364,000 in the previous week. Continuing unemployment claims declined to 2.714 million from a revised 2.811 million the previous week. Economists were expecting claims to come in at 348,000 and 2.766 million, respectively, so both were much better than expected.
Then on Friday, the Labor Department reported that only 194,000 new payroll jobs were created in September, which was a massive disappointment, since economists were expecting 500,000 new jobs. Ironically, despite the weak September payroll report, the unemployment rate declined to 4.8%, down from 5.2% in August, as more workers left the workforce. Meanwhile, the July and August payroll totals were revised up to 1.091 million (up from 1.053 million) and 366,000 (up from 235,000), respectively.
It appears that the primary culprit behind Friday’s disappointing jobs report was a 144,000 decrease in education jobs and an 18,000 decline in healthcare employment, which may be partially related to the Covid-19 vaccine requirements now being imposed. (The national shortage of school bus drivers and cafeteria workers is more likely caused by higher competing wages at transportation companies and restaurants.) Average hourly earnings rose by 19 cents, or +0.6%, to $30.85 per hour. The average work week rose to 34.8 hours in September, up from 34.6 hours in August. Overall, due to the disappointing September payroll report, the Fed now has an excuse to postpone its tapering if it wants to wait longer.
We must remember that the fourth quarter is a seasonally strong quarter, characterized by positive gains for October, November, and December, with January also a seasonally strong month, so we have four straight months of seasonal strength ahead of us. November is the strongest month in the fourth quarter, since we typically see an “early January effect” just before Thanksgiving, when small capitalization stocks surge. Also, Thanksgiving is a happy time of year as we gather with family and friends and kick off the holidays. When families are happier, the good feeling seems to rub off on the stock market!