Bulls Benefit From Some Christmas Cheer

Winter may be upon us, but consumer prices continue to sizzle on Main Street. The CPI Index rose 6.80% year-over-year (yoy) in November, in line with Dow Jones economist estimates of 6.70%. That’s the biggest increase since June 1982. Excluding food and energy, core CPI was up 4.90% from a year ago, which itself was the sharpest rise since mid-1991. We’re all feeling the sting of inflation these days with food and energy prices rising at the fastest rates in at least 13 years. Energy prices overall have jumped 33.30% yoy with gasoline prices in particular rising a whopping 58.10% from year ago levels. Holiday dinner looks to be more expensive this year with food prices up 6.10% from the same period last year. If you’re looking to gift a used car or truck this holiday season, good luck on finding a deal since their prices are up 31.40% yoy. Despite the record reading, markets managed to take the news in stride as it believes demand will ultimately subside and supply chain constraints will loosen over time to ease inflationary pressures. Consumers have been able to keep up their spending despite rising prices as wages have also moved higher. The affect has been most pronounced for people who have switched jobs. Payroll company ADP reported people who changed jobs saw an average wage growth of 6.60% in September, up from 5.10% in the first half of the year. The wage gains don’t seem to be disappearing soon. The Conference Board’s November survey reported companies are setting aside 3.90% of their payroll budgets for raises next year, a record high not seen in more than a decade. The survey also showed that companies are planning on raising salary ranges, which would result in higher minimum, median, and maximum salaries. In short, employers are feeling generous these days given that inflation is padding their top line. That’s bad news for any Scrooges hoping to retain workers

China’s factories were feeling the holiday crunch in November as strong global demand pushed up exports to a record high. Exports rose 22% in dollar terms from a year earlier to $326 billion. Demand was led by exports to the U.S. which were up 28.30%. Chinese imports also made a solid showing, rising 31.70% to $254 billion. Demand for goods around the world has remained remarkably strong throughout 2021 despite the expectation less strict Covid restrictions would lead consumers to shift their spending from goods to services. Consumers could continue to find comfort in goods well into 2022 if the Omicron variant were to run rampant and shutdowns accelerate. That scenario would work in China’s favor as its zero-Covid strategy has been able to keep Covid waves in check and factory floors sweeping up orders.   

 

The holiday cheer was back on Wall Street this week as major indices flirted with all-time highs. Investors reversed course on their previous concerns to Omicron’s economic impact and wasted no time in buying the dip. The bullish sentiment is supported by businesses having continued to defy analysts’ expectations.  Throughout 2021, analysts have been betting labor shortages, rising materials costs, and supply chain bottlenecks would hurt companies’ bottom lines, but Corporate America has negotiated the current operating environment flawlessly.  Inflation, which is typically toxic to markets, has not manifested in reduced demand in part because affordability is being supported by wage gains and limited supply has whet consumers’ appetites. One can imagine this theoretical world, where everything inflates, but the economy remains in equilibrium and everyone is happy because the velocity of money through the economy is high. The inconvenient reality, however, is that at some point either demand gets satisfied (or more likely the excess cash underpinning the demand gets spent), supply normalizes, fixed rate markets panic or the Fed over corrects while trying to tame inflation – any or all of which could throw a rod in this economic engine while it is running hot. Those are the questions the Federal Reserve will be debating at next week’s FOMC meeting, where their announcement will determine just how merry of a Christmas bulls will have this year.