Are Equities Getting Expensive or Can They Go Higher?
The answers to these questions are "yes" and "yes." While valuations are definitely stretched for most equity sectors, inflation has put a damper on other asset classes. Bonds and cash are under-water for the year, but after you adjust for inflation, investors in those asset classes are down 4-5% year-to-date. The S&P 500 Index is up 24% and change for the year, so even after you adjust for inflation, investors returns are still positive 19%. This year, the S&P has dipped below its 50-day moving average 7 times, only to regain market highs each time. During those pullbacks, the market has marched higher 19 days on average when recovering from pullbacks this year. Right now, we are 24 days into this most recent run up. Could we be due for a pull back? Maybe.
The good news is that the Fed's announcement of Tapering has, so far, had little impact on the bond market. While that story is not over, the build-up to the announcement likely means that most of the volatility that would accompany Tapering has already been baked in. We do expect yields to move higher in the coming weeks as Tapering ensues. The reports on the Labor Market more than justify the Fed's move on Tapering. Both the ADP private jobs report and the government's report shows more than 500,000 jobs added in October and more than 50,000 new jobs added in Transportation and Warehousing. This provides much needed help in the current shipping crisis.
What is more worrisome is the recently passed Infrastructure Bill that was passed in the middle of the night Friday. One has to wonder if Congress will continue passing bills that no one has a chance to review. In this case, the CBO (Congressional Budget Office) had not even issued their score to determine how much debt the bill would add to our current fiscal budgets going forward. The bill does provide for some badly needed infrastructure repair on roads, bridges, public transit, electrical grids, & airports. However, that only accounts for approximately $550 billion of the $1.2 trillion package. The rest is what we typically get from Washington, D.C. - pork, pork, and more pork. Many of these projects will likely include government contracts that do little to help infrastructure, but will include waste of taxpayer dollars. What is likely, is that the enactment of these projects will be akin to pouring gasoline on the fire that is inflation.
Speaking of inflation, we get the October data on the PPI (Producer Price Index) on Tuesday and the CPI (Consumer Price Index) on Wednesday. It will be interesting to see if the respective indices move higher and if that will spur the Fed to hike interest rates next year earlier than forecast. Otherwise, it's a pretty light week for economic data. There doesn't seem to be drastic improvement on the shipping front. The ports of Los Angeles and Long Beach have more than 84,000 containers waiting for transport, with 58,900 being fined for staying in port more than 9 days. The total of containers at port is 3,000 more than last week. This needs to be moving the other direction if we're going to see any relief in the shipping crisis.