Nov 15th Bi-Weekly Market Update

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The Top-Line

In the Macro
  • Biden takes a win on infrastructure, finally
  • US Jobs report surges 531,000, Canada follows suit with pandemic-era low unemployment
In the Micro
  • Earnings season for Q3 is justifying the rally

The Bottom-Line

In the Macro

Biden takes a win on infrastructure, finally

A group of people in a courtroom

Description automatically generated with medium confidence

Source: The Guardian

After all the back and forth, amendments, and political maneuvering, the Biden White House finally has struck a win. While the infrastructure bill was largely seen as bi-partisan, the $1.2 trillion price tag was proving too large for a smooth process. On November 5 the House finally voted 228 to 206 in favour (it passed the Senate in August), sending it on to President Biden to sign off on the spending. 

What’s in the bill? An economic boost. It is expected to boost jobs across the country with projects focusing on roads, bridges, and waterways, among other non-public infrastructure projects like broadband and electrifying the travel network. 

What did the US markets do? What you would expect – they hit all time highs after the deal:

Source: ycharts

While markets took a small breather last week, it looks like the government spending should be of good economic use in the future. Next up for the White House is the $1.85 trillion “Build Back Better Act” with welfare and climate change at the heart, to be voted on in mid-November. 

US Jobs report surges 531,000, Canada follows suit with pandemic-era low unemployment

It turns out October was a pretty good month for hiring. In the US, economists expectations were low of the mark, as the economy added 531,000 net jobs versus expectations of 450,000. Canada was no slouch either, and although the number was far below the US adding 31,000 jobs, unemployment in our country fell to a pandemic-era low at 6.7%. Considering the bloodbath that 2020 was on the jobs front, this was welcome news. 

Source: Tradingeconomics

Will the hiring keep going in the months to come? There aren’t many signs to the contrary. Although there has been mass quitting as this year, which has been dubbed the “Great Resignation,” there is a massive need for workers right now with more than 11 million jobs open in the US alone. The holiday season will likely lead to more numbers like these as retailers add seasonal workers. 

Are we past most recessionary forces in the near future? It sure looks that way but it is always good to keep guard. There are many forces out there that could put this rally on the back foot. More on that below. 

In the Micro

Earnings season for Q3 is justifying the rally

Source: Factset

If you’re feeling like the market is hitting too many all-time highs recently, you’re not alone. Despite a global pandemic, a jobs market that can’t find workers, supply-chain issues, and inflation scares, stocks seem to be ignoring it all and cruising to new heights. 

And while there is a lot of noise out there, one of the reasons we’re seeing the strength might actually be fundamental – earnings. In Q3 2021, companies are reporting blockbuster results. According to Factset, with 92% of companies having reported as of November 12, 81% have had a positive earnings-per-share (EPS) surprise and 75% have reported a positive revenue surprise. Not only that, but the earnings growth rate hit 39.1% in the quarter, the third-highest year-over-year rate reported by the index since 2010.

Of course, valuation will remain an issue, but it’s not as bad as it feels. The forward 12-month P/E ratio for the S&P 500 sits at 21.2, which is above the 5-year average of 18.4. While that’s extended, it’s not out of the realm of normal considering how low interest rates are. You have to pay a premium for companies with strong earnings power, and leverage is cheap right now. 

One thing we are keeping an eye on is something we touched on last week – inflation. Inflation in the US just hit a 31-year high at 6.2% in October. 

Source: WSJ

Inflation has the negative power to reduce earnings significantly if companies cannot raise prices without affecting demand. So far, it has not been a problem, but it is something to watch after the highest number of S&P 500 companies cited “inflation” on their earnings call in over ten years. If inflation is indeed transitory, however, we’re going to have companies that have successfully raised prices through the transitory period, and not likely to drop prices after input costs subside. That means more bottom-line surprises to the upside.

As always, if you have any questions or would like to discuss further, please do not hesitate to reach out. Feel free to share with your friends and family too, as referrals are the best compliment we can receive. 

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