Dow Breaks 36,000 Amid Strong Economic Reports

November 5th, 2021

Market bulls celebrated another milestone this week, breaking the 36,000 level for the first time ever. The level first grabbed headlines when the aptly titled “Dow 36,000” hit bookstores in October 1999 during the height of the dot.com boom. In the book, the authors argued the index was undervalued and was poised to rally from its roughly 10,000 level to 36,000 that very year. The prediction was a bit off on the timing of the achievement, however, taking 22 years to hit that level. The index’s performance in the last 1.5 years is particularly notable, rising a staggering 95.40% from its March 2020 trough to Friday’s close. The market’s run has been supported by central banks around the world unleashing an unprecedented amount of fiscal and monetary stimulus to fight Covid. However, the market’s stellar performance could be poised to slow now that the Federal Reserve has announced it will reduce its bond purchases, the first step towards normalizing monetary policy. The move coincides with a healthy U.S. economic backdrop as this week’s jobs, manufacturing, and services posted strong results. For the week, the Dow finished higher by 1.42%.

Fed Talks Taper

The long-anticipated taper investors have been waiting for has finally arrived. The Federal Reserve announced on Wednesday it would begin reducing its pace of bond purchases by $15 billion later this month. The purchase reductions will be divided between Treasurys and mortgage-backed securities–$10 billion less in Treasurys and $5 billion less in mortgage-backed securities. The decision to do so is evidence the Fed is confident the economy will continue to make additional progress towards the bank’s employment and inflation targets. The Fed also acknowledged the elephant in the room, high prices. Chairman Powell went to great lengths to acknowledge the pain this creates on many families but reiterated the Fed’s belief that inflation will be transitory and ultimately resolve as supply catches up to demand. The central bank did, however, add the caveat that high prices may last well into next year. Markets took the taper announcement in stride given that the Fed has gone to great lengths to signal this shift was coming. Also helpful was the statement from the Fed that they do not expect rate hikes to occur before mid-2022, although the market seems to be taking that with a grain of salt. If the latest Fed projections hold, investors may see just one 25 basis point hike in 2022.

Nonfarm Payrolls Roar in October

Hiring was brisk in October as businesses added 531,000 to their payrolls. That beat estimates of 450,000 hires. September payrolls also got a bump from the Bureau of Labor Statistics, revising its initial estimate from 194,000 jobs to 312,000. Meanwhile, the unemployment rate fell to 4.60% in October, a new pandemic low. Job growth was broad-based with leisure and hospitality, professional and business services, and manufacturing leading the way. If you’re considering asking for a pay raise or leaving your job for a higher paying one, you may want to consider striking while the iron is hot. The jobs report showed wages were up 4.90% from the year ago period. Since June, wage growth has averaged 4.30% versus roughly 3.00% pre-pandemic, demonstrating it is a job hunter’s market. It looks like this will remain so for some time since the supply of labor remains relatively weak. The labor force rose by a modest 104,000 during the month which resulted in the labor force participation rate holding steady at 61.60%. That’s 1.7 percentage points below the pre-pandemic level. Overall, the report was encouraging, albeit providing some headwinds to economic output due to labor shortages in many sectors.

Shops Sweep Up Ahead of the Holiday Crunch

Business continued humming along ahead of the holiday crunch. The ISM Services index jumped to a record 66.70% in October, up from 61.90% in September. Numbers above 50 indicate expansion, while numbers below 50 indicate contraction. Numbers above 60 are considered to be exceptional. The record was achieved as a reduction in coronavirus cases nationwide spurred consumers to venture out and spend more freely at restaurants, hotels, and airports. Manufacturers also continued to confound the economists, posting exceptional growth once again in October as demand for goods remained high. The ISM Manufacturing Index hit 60.8%, driven by growing employment, re-stocking, and new export orders. The growth in both sectors is poised to continue as businesses remain optimistic kinks in the supply chain will be resolved in the year ahead.

Given strength in corporate and economic readings that we continue to see, we’re frankly running out of new creative narratives from week to week. The one new factor with the Fed having formally announced its taper is that we’ve gone from the Fed theoretically tightening to their actually tightening. That distinction was not met with any consternation, but it does delineate a shift in monetary policy that will play a bigger factor over time as investors seek to front run future Fed moves knowing that the bias is now toward higher rates. Inflation keeps getting headlines, but to the degree inflation is high, investors seem satisfied they have a good handle on the causal effects, wages are rising to help offset potential demand impact, and people still want to get out and spend. Monetary and inflationary forces take time to work their way through but in the meantime, there is positivity in the air

The Week Ahead

Prices are in the hot seat as traders pour over the latest CPI and PPI readings. Overseas, China releases October import and export figures.

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Daylight Saving Time Ends this Weekend

Love it or hate it, this Sunday marks the end of Daylight Saving Time (DST). The good news is the majority of Americans will get back the hour of sleep we lost in March. After clocks “fall back,” it’ll be lighter earlier in the morning and darker earlier in the evening. Germany has been credited with initiating DST, but residents of a town in Ontario, Canada were the first to set their clocks one hour ahead of standard time in 1908 to make use of more sunlight in the spring, summer, and fall evenings. Germany and Austria were the first countries to use DST in 1916.

The changing of the clocks has become a highly debated topic. In the last four years, 19 states have enacted legislation or passed resolutions to “lock the clock” and provide for year-round DST. Texas is not one of them, however.

The U.S. introduced time changes as a wartime measure to conserve coal during World War I. The idea was that extra daylight would minimize the use of fuel needed to produce electricity. The savings did not seem to materialize, so Congress repealed the act in 1919 before the war ended. Following the repeal, individual localities could decide whether and when to move forward or back, creating no uniformity and much confusion. A year-round national DST returned during World War II but after its repeal three weeks after the war’s end, the chaos of clocks resumed. States and localities could start and end daylight saving whenever they pleased. In 1965 there were 23 different pairs of start and end dates in Iowa alone. Passengers on a 35-mile bus ride from Ohio to West Virginia passed through seven time changes. It was not until 1966 that Congress passed legislation setting a nationwide time standard. The Uniform Time Act of 1966 restored a standardized DST.

Individual states can choose whether to observe DST but cannot adopt DST permanently without permission from Congress. States that adhere to daylight saving must agree to change the clocks at a specified time and day or stick with standard time throughout the year in accordance with federal law. States that do not follow daylight saving and instead follow a permanent standard time include Arizona, Hawaii, Guam, American Samoa, Puerto Rico and the U.S. Virgin Islands.

Prior to 1883, time was determined locally with the majority of areas using the position of the sun as a reference for local time. In order to maintain accurate train schedules and prevent crashes on railroad tracks used by multiple locomotives, the railroad industry created a universal time standard by dividing the continent into official time zones with a standard time within each zone: Eastern, Central, Mountain, and Pacific. By 1918, the U.S. government took control over the time standards and implemented the first DST on March 31, 1918.

In 1972, Congress revised the law to allow states that were in two or more time zones to exempt the part of the state that was in one time zone while providing that the part of the state in a different time zone would observe DST. The legislating of time didn’t end in the 1970s. Under legislation enacted in 1986, DST started in April and ended in October but was extended to March through November beginning in 2007. DST in the U.S. now begins at 2:00 a.m. on the second Sunday of March and ends at 2:00 a.m. on the first Sunday of November.

Opponents of DST point to research that shows that the increase in residential electricity use through additional demand for air conditioning on summer evenings and heating in early spring and late fall mornings do not offset the savings from lighting. Some also argue that increased recreational activity during DST results in greater gasoline consumption. Many retail businesses and the tourism industry support DST, claiming that the extra sunlight makes people stay out later and spend more on shopping, restaurants, festivals, outdoor activities, and concerts. Polls show that Americans don’t like changing their clocks but only time will tell if we can agree on whether we spring forward permanently or fall back forever.

MARKET COMMENTARY