The Fed Begins Stepping on the Breaks
It was a good week to be in the market as all three major U.S. indices closed nicely higher. The earnings announcements continue to remain unpredictable, and individual stock movements are all but impossible to forecast in the near-term. However, the general direction of the stock market is higher and taken as a whole, that’s a good thing. Lending to some of the optimism were two major events this week including the Federal Reserve’s announcement on tapering its bond buying program and the October nonfarm payroll report.
Perhaps the most important event this week was the Federal Reserve’s announcement on Wednesday. The Fed finally announced the much anticipated “taper.” We’ve been awaiting this news since early summer, so it did not come as a surprise. In fact, it is exactly what was expected. The Fed will begin tapering its bond buying by $15B a month beginning later this month and ending sometime around June or July of next year. Because this was widely telegraphed for some time now, it did not move markets much other than to reassure investors it doesn’t plan on raising interest rates anytime soon. In his press conference, Mr. Powell made clear that supply constraints have been longer lasting than originally anticipated, and that the timing of resolving supply bottlenecks remain uncertain. He also reiterated that interest rate hikes won’t begin until the Fed’s mandate for full employment is met. Most analysts expect the first rate hike to happen late next year at the earliest.
The second event that helped bolster markets was the October jobs report which came in higher than expected and was a nice contrast to the report from September. The headline grabbing story of the past month has been the “great resignation.” Media outlets jumped on the theory that since the September jobs report came in so weak, people not only don’t want to work but are quitting their jobs. October proved them wrong with payrolls increasing 530,000 in the month, which was well beyond the 450K expected. Additionally, September’s payroll number was revised up from 193K to 312K. Most notably, job gains were made in leisure and hospitality, in professional and business services, in manufacturing, and in transportation and warehousing. In a nutshell, jobs were gained in virtually all sectors of the economy, the exception being in public education which saw jobs decline. These reports support the thesis that the economic recovery, while admittedly facing some headwinds, continues unabated into the end of the year notwithstanding supply chain problems.
In other news, there is something you should be aware of that hasn’t garnered the attention of the media just yet. I recently received a letter from Duke Energy suggesting I prepare for higher heating and electricity bills this winter. Consolidated Edison sent letters out to New Yorkers warning they will pay an average 24% more this winter than last to heat their homes. There are two issues at play that are creating the perfect storm, so to speak. Natural gas prices have almost doubled since the start of the year. As prices rose, many utilities switched over to coal, which they often do in the winter as temperatures drop and demand for natural gas rises. However, this has created another issue in that coal stockpiles are at a twenty-four year low. I bring this up to prepare you to for the very real possibility that the costs of heating your home this winter could be substantially higher than in previous years. If you live in a Southern state, disregard this warning. Unless you live in Texas, in which case get a backup generator!
And lastly, I turn to what are being called boomerang boomers, or those over-50 moving back in with their parents. I was surprised to hear of this trend but the pandemic has changed so much about how we live that this seemed fitting. There is a growing trend of baby boomers moving back in with their parents. Now before you go assuming it’s just more laziness, the reasons are varied. For some it ensured their parents had care and company during the lockdowns last year. While for others it was due to financial or relationship issues. For many it turned out to be a very positive experience. With rising inflation and increasing energy bills on the horizon, the idea of sharing the costs of living are attractive. For many, what started out as a temporary arrangement has become a permanent one. Now you know.
Bruce J. Mason, MBA