How Will Ongoing Price Increases Impact the Stock Market?

NYSE: SPY | SPDR S&P 500 ETF Trust News, Ratings, and Charts

SPY – Volatility has been the name of the game for the S&P 500 (SPY) the last few weeks as investor optimism over the summer has turned into pessimism recently. A host of concerns have kept investors ruminating, with higher prices being the most pressing. We saw disappointing employment and CPI figures recently, but things aren’t as bad as they seem. The economy is on solid footing and continues to grow, which should help support equity prices going forward. I’ll discuss this and more below….

(Please enjoy this updated version of my weekly commentary published October 14, 2021 from the POWR Value newsletter).

The markets have been pretty choppy over the past couple of weeks as investors continue to monitor anything that could stop the bull market. The latest being ongoing price increases. High demand and supply chain obstacles drive the price of commodities higher, specifically oil and natural gas, leading to the recent pessimism in the markets.

However, I view these concerns as temporary as the economy has strong underlying fundamentals that should propel markets in the upcoming months. If we use the Conference Board U.S. Leading Economic Index as a gauge of future growth, its current level of 13.7% six-month annualized growth is a high number historically, which indicates the economy is on solid footing with more growth to come.

As I’ve mentioned in previous commentaries, there is a lot of cash in consumer bank accounts waiting to be spent. While the historically low rates haven’t helped savings accounts, they have made monthly expenses lower. The Federal Reserve Financial Obligation ratio, which measures monthly payments to disposable personal income, is near all-time lows.

This economic growth should continue to support stock prices. Even though many stocks have seen their prices rise, the percentage increase in price has been less than the percentage increase in earnings growth, which means there is still a lot of upside in the market. In terms of inflation, we may see continued volatility as supply chain issues work themselves out.

Today we learned that the Consumer Price Index rose 5.4% in September compared to last year. This is the fastest pace since 2008. The Core Index, which excludes food and energy, rose 4% over last year, down from June’s 4.5% figure. I would focus on the core number, which excludes energy. The recent rise in energy prices has undoubtedly played a role in the broad figure.

Another issue I’ve covered is the debt ceiling. Congress lifted the debt ceiling by $480 billion and avoided default last week. While this agreement is only good until December, the chances are slim that this doesn’t get worked out in the long term. There is just too much lobbying on both sides from the business community.

The jobs situation also warrants a mention as that has been on the minds of investors lately. Last Friday, we learned that U.S. employers only added 194,000 jobs in September, compared to the 500,000 expected. This is the second consecutive month that the jobs number came in below analyst expectations. Also of note is that job growth also slowed in August.

I’m not too concerned with these figures, and here’s why. The unemployment rate fell to 4.8% in September, down from 5.2% in August. Plus, the survey was taken mid-month, when the Delta variant of COVID peaked. So, I expect these figures to be much better in October.

This week, the third-quarter earnings season started with JPMorgan Chase (JPM) and BlackRock (BLK) posting results before the bell this morning. JPM, which is the largest U.S. bank by assets, topped estimates on both revenue and sales. This bodes well for the economy as the banking industry is considered a bellwether of the economy.

While I have mentioned that the average S&P earnings growth estimate is 27.6%, earnings season may be slightly rockier than last quarter. The rise in commodity prices and supply-chain challenges may have dragged on profits, which is why some analysts have been trimming their estimates.

While there may be some short-term volatility, I’m not too concerned. These issues will diminish over time. In fact, investors should pay more attention to what executives have to say about their outlooks. This will give us a better idea of what’s in store this quarter.

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David Cohne
Chief Value Strategist, StockNews
Editor, POWR Value Newsletter

SPY shares were trading at $441.92 per share on Thursday afternoon, up $6.74 (+1.55%). Year-to-date, SPY has gained 19.35%, versus a % rise in the benchmark S&P 500 index during the same period.

About the Author: David Cohne

David Cohne has 20 years of experience as an investment analyst and writer. He is the Chief Value Strategist for and the editor of POWR Value newsletter. Prior to StockNews, David spent eleven years as a consultant providing outsourced investment research and content to financial services companies, hedge funds, and online publications. David enjoys researching and writing about stocks and the markets. He takes a fundamental quantitative approach in evaluating stocks for readers. More...

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