Overview: Stock returns were positive last week, led by the U.S. markets that moved higher on strong third-quarter earnings and the specter of a delay in plans for federal tax increases. The S&P 500 index ended the week near all-time highs, trading up 1.7% for the week. International stocks lagged, as default concerns in the Chinese property sector challenged sentiment. In the bond markets, yields were higher as initial jobless claims fell to a new pandemic low of 290,000, bolstering confidence in the labor market recovery. The 10-Year Treasury yield finished the week at 1.65%, 0.12% (12 basis points) higher in yield since the beginning of October. In Europe, strong earnings boosted the 10-Year German Bund yield to a new post-pandemic high, closing the week at -0.10%. For reference, the German 10-year yield began the year 2021 around a -0.60% yield. The benchmark bond, while still at a negative yield, has risen in yield by a full 0.50% as economic conditions in the Eurozone continue to improve.
GDP update: (form JP Morgan) Third-quarter Growth Domestic Product (GDP) is due out this Thursday and should show a marked deceleration from the first half of the year. While consensus still anticipates modest growth, our models forecast a slight outright decline. GDP growth has been particularly tricky to forecast through the pandemic, but regardless of the exact number, a slowdown should not come as a surprise. Both supply shortages and a pause in the reopening of services, due to the Delta variant, weighed on growth last quarter, leading us to revise down our forecast to -0.1% quarter over quarter annualized and 4.3% year over year.
For the past year, but particularly over the summer, supply shortages have led to both higher prices and lower real consumer spending. Indeed, we believe that real consumer spending likely grew by less than 2% quarter over quarter in the third quarter, compared to +12.0% quarter over quarter in the second quarter. Beneath the hood, the third quarter saw a 21% drop in light vehicle sales – this alone cut our estimates of third-quarter growth by almost three full percentage points. Beyond consumer spending, inventories likely continued to decline, albeit at a slower pace than last quarter. Additionally, dips in business investment (-2.6% quarter over quarter) and residential construction (-1.2% quarter over quarter) likely further limited the GDP’s strength last quarter. On a more positive note, the slowdown in GDP is likely to be short-lived, as production and consumer spending should ramp up in the months ahead. Consequently, GDP growth could bounce strongly to as high as 8.0% quarter over quarter in the fourth quarter and round out 2021 at a very healthy +5.2% year over year. As U.S. growth reaccelerates, investors should expect a boost to cyclical, energy and value stocks.
Market Returns and Data
Sources: JP Morgan Asset Management, Goldman Sachs Asset Management, Barron’s
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