Weekly Stock Market Report: Stagflation Coming?

Key Drivers for the Week of Oct. 4, 2021

TIP – This is a 1-minute brief bullet-point summary. It is a tool that gives investors and financial a fast and simple list of what to watch for and talking points for the week.

• Supply constraints slowing growth, boosting inflation, giving rise to stagflation talk
• Debt limit gets kicked down the road, infrastructure bill stalls in Congress
• U.S. jobs report, services PMI may help determine timing of QE trimming
• Canada releases employment report, Ivey PMI; BoC Governor Macklem speakd
• China holiday for Golden Week, releases September services PMI
• Japan reports Tokyo CPI, services PMI, consumption, current account due
• India RBI expected on hold; Australia RBA expected steady; RBNZ seen hiking
• Eurozone services and composite PMIs, PPI, retail sales; ECB minutes
• Germany reports industrial production, trade data, manufacturing orders
• U.K. data on services and composite PMIs, CIPS construction PMI

Key Market Trends

Tip: Use this as a quick guide on the short-term direction of key markets. I once had a client that would call me nearly every day asking the direction of the markets. It is a quick cheat sheet to know the trend and help understand what is happening with the markets in the short term.

Stocks & ETF Watch List

Tip: Use this section to find stocks and ETFs to add value to your portfolio by increasing the alpha (return) and decreasing beta (beta). Our list is updated monthly to help provide our readers with timely insights. Readers should do their own research before making any investment. In order to make our report easier to read, we are now including the stocks as lists for readers in separate posts.

• Inflation Stock Picks: List of stocks that we think should perform better in a rising inflation environment. Click here
• Auto Parts Stock Picks: Auto parts companies are likely to see their stocks rise as the average age of cars and light trucks increased from 11.9 years in January 2017 to 12.2 years in January 2021, according to new data from IHS Markit. Below are the top auto parts companies that investors should buy now before the profits roll in. Click here.
• Solid Picks: This group of stock/ETF picks is likely to experience growth and perform well into the near future. Click here.
• Dividend Stocks: List of stocks that have excellent dividends and business performance. Click here.
• Dividend Growth Stocks: List of stocks that have a history of growing dividends. Click here.
• Dividend ETFs Picks: This list of ETFs is selected for their ability to pay dividends. Click here.
• Dogs of the Dow: This list of DOW stocks based on H. G. Schneider’s Article in the Journal of Finance in 1951 that used the price-earnings ratio. The general idea is that blue-chip companies that pay a dividend are more likely to withstand an economic downturn. Click here.

Week Ahead: Stagflation Coming?

Q4 kicked off under the same pandemic clouds and bottlenecks that plagued Q3 and which deflated global growth and boosted inflation. The markets twisted and turned around the myriad cross-currents, including the rise of the Delta variant, renewed mitigation measures, shortages of labor and material, waning fiscal support, the threat of less accommodative financial conditions, and an ongoing regulatory crackdown from China, alongside a rising and widening rate of vaccines, and expectations for a huge $3.5 trillion U.S. infrastructure package.

Congress appears to be gridlocked on the increased spending package. Progressive Democrats continue to push for a $3.5 trillion package but lack the votes to push it through. Meanwhile, Democrat leadership is trying to pass a much smaller bill that no one appears to be happy with.

Core bond yields rose to vary degrees during Q3 on rising price pressures and hawkish central bank pivots. Equities slumped too, on signs of slowing growth, rising prices, and the threat of tightening financial conditions.

The resulting growth-inflation dynamics revived the “S” word, “stagflation,” and that will be the theme over the near term. A lot of focus will be on the “stag” portion with worries supply constraints will last longer with more widespread disruptions than initially foreseen. PMIs are on global dockets and should reflect those impacts.

Cathy Wood, Chief Executive and Investment Officer of Ark Invest ($52.85 Billion AUM), believes that rotation from growth to value stocks has reduced the risk of a tech bubble burst, and is likely to extend the current bull market. “Had the equity market continued to narrow toward innovation [tech stocks], the odds of a bust… [of the] tech and telecom bubble would have increased.”

Wood goes on to add that businesses expect “a protracted recession – if not depression –” and as a result, “businesses slashed inventories and capital spending and now are grappling with record-low inventories relative to sales. As businesses scramble to catch up with demand, we would not be surprised to learn after the fact that they have double- and triple-ordered supplies only to see demand for durable and nondurable goods disappoint as, once vaccinated, consumers satisfy pent-up demand for services.”

Additionally, the key U.S. jobs report is slated and could go a long way in determining the timing of the long-anticipated QE taper. Concurrently, while many policymakers continue to play down inflationary pressures and term them “transitory,” BoE Governor Bailey has fueled tightening speculation by stressing that rates could rise even before the end of asset purchases. There are several central bank meetings this week, including the RBA, RBNZ, and RBI, with the RBNZ expected to hike rates.

U.S. markets have been buffeted by the various factors noted above, along with the fiscal policy uncertainties including reconciliation, the debt limit, and possible default. While the fiscal issues are most prominent, we expect the debt limit issue to be resolved ahead of the assumed October 18 drop dead, default date.

However, bottlenecks and shortages will be more long-lasting and impact into the new year. Recent data caused us to sharply mark down our Q3 GDP forecast to a 3.6% pace from 4.0% previously and 4.5% before that. Indeed, the vehicle sector has been crushed by semiconductor and parts shortages, while port bottlenecks have sent shock waves through the broader factory sector. Farmers report massive delays in farm equipment delivery, with many buying planting equipment that may not be available before the spring. There are also growing fears over the availability of goods for the Christmas season. All of these factors will play into the FOMC QE taper calculus, though Fedspeak has indicated nearly all are ready to begin reducing asset purchases this year.

The September nonfarm payroll report highlights (Friday). We’re forecasting a 400k increase after gains of 235k in August, 1,053k in July, and 963k in June. That should be sufficient to meet the “substantial further improvement criteria,” especially after Fed Chair Powell indicated it is the cumulation of data that is important, and the strength of one or two reports. A drop in the jobless rate, we’re forecasting a slide to 5.1% from 5.2%, should add to the evidence on the labor market’s gains. Hours-worked is assumed to rise 0.6%, after the 0.2% August increase, while the workweek holds at 34.7 for a third month. Average hourly earnings are assumed to rise 0.3% with the y/y wage gain ticking up to 4.4% from 4.3%.

The other key report this week is the ISM-NMI index (Tuesday). We expect it to fall to a still-robust 61.0 from 61.7 in August and a 64.1 all-time high in July. The headline has bounced back from the 11-year low of 41.8 in April of 2020. Attention will also be on the price gauge which dipped to 75.4 in last month’s release from the all-time high of 64.1 in July. The economic calendar also includes factory orders (Monday), trade (Tuesday), and the ADP (Wednesday), though none will carry much market weight.

Earnings will help round out the week with Pepsico (Wednesday), Constellation Brands, Levi Strauss, and RPM International (Thursday), and ConAgra (Friday). The Fedspeak slate is light with Bullard (Monday), one of the most hawkish, who discusses the economy. VC Quarles discusses libor transition (Tuesday), with the hawkish Mester speaking on inflation dynamics (Thursday).

The Canadian employment report (Friday) is the focus of this week. And while it will provide insight into the health of the domestic labor market, it will also fit into the overall outlook on global growth as bottlenecks and supply constraints are a world-wide problem. We are projecting a 100k gain in September, marginally better than the 90.2k increase in August. Some of the uptick is expected to come from the Federal election which is expected to provide a lift to jobs last month. But, but look for the gain to be unwound in October.

Meanwhile, the unemployment rate is seen decreasing to 6.8% from 7.1%. As for the other reports this week, the trade surplus (Tuesday) is expected to narrow slightly to C$0.6 bln in August from C$0.8 bln in July. Building permits (Monday) are projected to rebound 4.0% in August after the -3.9% drop in July. The Ivey PMI for September is due Thursday. Bank of Canada Governor Macklem speaks on the global financial architecture (Thursday).