In this week’s Monday Market Insights, we discuss recently enacted legislation, the Producer Price Index, and the U.S. job market. Our Chart of the Week highlights the lack of style leadership in the market year-to-date. Finally, we discuss how the increase in borrowing by consumers and businesses should benefit bank stocks in the months ahead.
Top Weekly Themes
President Biden Expected to Sign Infrastructure Bill into Law – Last week, President Biden received the Infrastructure Investment and Jobs Act, more commonly referred to as the “Bipartisan Infrastructure Package,” after it passed the House of Representatives (House). However, as of mid-last week, he has yet to sign the legislation into law and is not expected to do so until Congress is back in session. As discussed previously, the legislation will invest an additional $550 billion into projects that range from roads and bridges to expanding broadband access. Following passage by the House, infrastructure-related stocks rallied, including Astec Industries, a manufacturer of road paving equipment, held in an internally managed equity strategy that saw its stock climb more than 17% in the days following.
Producer Price Index Rises 8.6% Year-over-Year – Last month, the Bureau of Labor Statistics released its monthly gauge of Wholesale prices, the Producer Price Index (PPI). The index climbed 0.6% month-over-month in October, a modest acceleration from September’s 0.5% rise. The lion’s share of the increase in prices was within Goods rather than Services, and a third of the increase resulted from a 6.7% rise in the price for gasoline. Excluding food, trade, and energy prices from the Index resulted in prices rising 0.4% month-over-month or 6.2% on a year-over-year basis. While current inflation levels stay top-of-mind, we remain steadfast in our belief that this period of elevated prices will pass as supply chain issues abate.
U.S. Job Gains Accelerate in October – The Labor Department released its monthly employment situation report for October that showed a 531,000 increase in nonfarm payrolls, a big improvement from September’s paltry 118,500 jobs. The unemployment rate also improved to 4.6% compared to 4.8% in September. The labor force participation rate remained consistent month-over-month at 61.6%. The report noted that job growth was widespread, but there were large gains in leisure and hospitality, professional and business services, as well as manufacturing, transportation, and warehousing. The latter two categories are contributors to some of the supply chain issues currently impacting the United States. Further job gains in the months ahead should help to alleviate inflation pressures driven by supply chain bottlenecks.
|Russell 1000 Value||1.2||1.5||22.7||16.79||11.35||1.77|
|Russell 1000 Growth||0.0||(3.5)||23.4||30.79||23.83||0.64|
|MSCI EM (Emerging Markets)||3.7||2.9||(4.0)||11.03||10.03||2.38*|
|Fixed Income||Week||YTD||1-Year||3-Year||5-Year||Div Yield|
|Bloomberg Barclays US Aggregate||(0.3)||(1.5)||(1.9)||4.21||3.16||1.98|
|Bloomberg Barclays US High Yield – Corporate||(0.2)||(0.6)||4.6||7.50||5.93||4.45|
|Bloomberg Barclays Municipal Bond||(0.7)||(0.9)||0.7||4.30||3.74||1.31|
|Bloomberg Barclays Global Aggregate x US (Country)||0.3||(0.3)||(5.8)||2.44||2.94||1.15|
|Crude Oil WTI (NYM $/bbl) Continuous||6.2||9.9||55.3||17.0||9.3||82.6|
|Natural Gas (NYM $/mmbtu) Continuous||16.6||21.6||59.8||13.7||5.1||4.3|
|Gold NYMEX Near Term ($/ozt)||0.1||(0.0)||(0.9)||12.4||8.8||1,827.2|
|Copper Cash Official LME ($/mt)||(1.2)||(0.2)||21.1||17.7||10.9||9,665.0|
|Currencies||1 Week Ago||YTD||1-Year Ago||3-Years Ago||5-Years Ago||Current Level|
|U.S. Dollar per Euro||1.13||1.24||1.22||1.15||1.07||1.14|
|Japanese Yen per U.S. Dollar||115.79||115.16||104.20||108.41||114.03||114.85|
|U.S. Dollar per British Pounds||1.36||1.35||1.36||1.28||1.22||1.37|
Chart of the Week: 2021 Has No Style
- Style leadership in 2021 has been less definitive than in years past. Specific areas tend to frequently dominate both performance and media headlines. In the table above, Growth versus Value has produced different results depending on the size bucket. With Small-cap Value outperforming Small-cap Growth while Large-cap Growth outperformed Large-cap Value, there has been no standout area of performance in 2021.
- The dispersion between Size and Style has been driven by earnings growth rather than macro factors like interest rates and changes in price-to-earnings (P/E) multiples. This is visualized in the chart with the S&P 500 P/E multiple. Although the S&P 500 is up more than 20% year-to-date, its P/E multiple has been stagnant, meaning returns have been driven by higher earnings.
- 2022 will likely have greater divergence amongst investment styles as the business cycle matures and earnings growth becomes more elusive. As discussed last week, this will likely lead to us shifting our asset allocation towards Large-Cap Growth stocks and reducing exposure to more cyclically oriented stocks.
Commentary – Banks Set to Benefit from Liquidity Depletion
Loan growth has remained elusive for banks since the onset of the pandemic. As government transfer payments and monetary policy kept the economy flush with cash, there was little need for consumers to borrow. Instead, many reduced their debt and boosted their savings. With government programs coming to an end and excess liquidity subsiding, consumers and businesses will likely begin to borrow again. This increase in borrowing should provide a boost to bank lending, earnings, and stocks. In the near term, credit losses will remain low given a healthy economy and the excess liquidity that remains in the financial system. We expect banks to perform well through the beginning of 2022, but a deceleration in economic growth could hinder back-half returns.