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There was a lot of market-moving economic news this week. Wednesday, the Federal Reserve ended their two-day meeting and announced their plan to begin reducing asset purchases. The Fed has been buying $120 Billion per month in bonds, $80 Billion of US Treasuries, and $40 Billion of agency mortgage-backed securities to support the bond market through the pandemic. The Fed will reduce US Treasury bond purchases by $10 Billion and agency mortgage-backed securities by $5 Billion in November and December. It is expected that the rate of decreasing bond purchases will continue, and the Feds bond-buying program will end in the Summer of 2022. Chairman Powell indicated that adjustments could be made should economic conditions change. Chairman Powell reiterated that there is a higher bar for raising the Fed funds rate; raising rates is not expected until after the Fed has completed the tapering of their bond-buying program. Many believe the Fed will begin raising interest rates later in 2022 in response to increasing inflation pressures. The Fed has done an excellent job of communicating their intended path and not being surprised markets responded well.
Thursday, the Labor Department reported that weekly initial jobless claims fell by 14,000 to 269,000. This number was better than expected and marked a pandemic period low—March 14th, 2020, pre-pandemic initial jobless claims were 256,000.
Friday, The Bureau of Labor Statistics reported that nonfarm payroll employment rose by 531,000 in October, and the unemployment rate fell to 4.6%. This report exceeded expectations, and equity markets rallied to new highs. We are all aware of the labor shortages. Unfortunately, there is no end in sight. The most recent data shows that we have more job openings than human beings to fill them. When I was in business school, an economics professor commented that full employment was 5%. He opined that anyone who wants a job has one once you fall below a 5% unemployment rate, and anyone worth hiring has been hired.
Pfizer announced results from their clinical trial of its experimental Covid-19 pill. When combined with a low dose of an HIV drug called ritonavir, hospitalization or death were reduced by up to 89% among high-risk patients. On CNBC Squawk Box, the former head of the FDA, Dr. Scott Gotlib, said, “By January 4th, this pandemic may well be over, at least as it relates to the United States after we get through this Delta wave of infection,” he said. “And we’ll be in more of an endemic phase of this virus.”
With Congress contemplating infrastructure bills, and the possibility of the pandemic coming to an end, the labor market should remain firm.
Coming into October, there were those warning that markets were at risk of a significant sell-off. Inflation, the possibility of rising interest rates, the threat from higher oil prices, and a policy misstep from the Fed were all cited as reasons the bull market could end. All those risks remain, and I will continue to monitor the economic data. You should never be so confident in your investment outlook that you discount the risks. For now, I see solid corporate profits, a strong labor market, an accommodative Fed, and a potential end to the pandemic outweighing the risks. This past Friday, I adjusted the portfolio models during a scheduled rebalance. The most recent changes increased diversification and slightly reduced risk.
We are in a seasonally strong period for equity markets. Considering the solid economic data, we could see equity markets continue their upward trajectory into year-end. As I always say. I do not have a crystal ball; I can’t see the future nor defy gravity. I can monitor markets and economic conditions and keep you informed. Please call me with any questions or concerns.