- Nov. 9, 2021
-- November started off on solid footing, with equity markets logging their best weekly return in more than four months1
. Between a patient Fed, accelerating jobs gains, strong corporate earnings, and a promising COVID-19 pill that reduced hospitalizations and deaths in a clinical trial, there were plenty of reasons for the market to rally. And investors didn't miss the cues, pushing equities to new highs. We'd offer five takeaways from last week's developments.1. Tapering begins, but Fed is in no rush to hike rates
2. Jobs vs. inflation - Two mandates in tension
- Last week the Federal Reserve (Fed) announced that it will begin to wind down ("taper") its monthly pace of bond purchases, currently at $120 billion, by $15 billion per month. At this pace, the Fed will phase out the purchases entirely by next June. This withdrawal of last year's emergency support was widely expected because it was signaled by policymakers in advance.
3. Tapering unlikely to be a key market driver
- There is growing tension between the Fed's two mandates of full employment and stable prices. On one hand, the Fed's preferred measure of inflation hit a fresh 30-year high in September and has stayed above 3% for the last six months1. This overshoot argues for tighter policy. But on the other hand, employment, even after last month's solid gains, is still over four million below its pre-pandemic number, which warrants an accommodative policy.
4. Signs that the recent soft patch might be ending
- The Fed's purchases of government bonds and mortgages have been instrumental in normalizing credit conditions and lowering borrowing costs for households and businesses. But with the Fed now starting to turn off the liquidity spigot, it is logical to wonder what the market impact will be.
5. 64 new highs – favorable seasonality could help add to this year's tally
- The U.S. economy added 531,000 jobs in October, the most since July and the first upside surprise in three months. Aside from the strength in the headline number, details were also positive. As the delta-variant wave of infections eased, job gains in leisure and hospitality accelerated.
Sources: 1. Bloomberg, 2. Morningstar Direct
- After logging seven new highs over the last seven trading sessions and the most record highs in a year since 2013, the S&P 500 is on track to finish 2021 strong2. On top of the solid macroeconomic backdrop, favorable seasonality might be another reason why the positive momentum could carry through to the end of the year. Historically, the two-month stretch between November and December has been rewarding for investors, with above-average equity-market gains and the highest chances of positive returns2.