The S&P 500 closed the week at yet another all-time high. The index has now picked up roughly 27% on the year and shows few signs of slowing any time soon. This is especially true as we move into one of the stronger stretches of the calendar historically. Delta is waning, job numbers are improving, earnings have generally beaten estimates across the board, and concerns about major corporate and individual tax increases have mostly been pushed to the side. Still, inflation continues to run hot, and the Fed has announced they will begin tapering asset purchases later this month. Ordinarily, this might concern the market, but participants have judged that the good outweighs the bad for now.

The pandemic is winding down, and we are starting to see notable improvement in the employment picture. The US economy added 531K jobs in the month of October relative to economists' expectations for 450k jobs. The unemployment rate now sits at 4.6% and continues to trend back towards the pre-covid level. Still, there remains an abnormally large portion of the population out of the labor force. The labor force participation rate still sits roughly 2% below its pre-pandemic level. Getting these people back into the labor force could help ease the supply chain bottlenecks, but it will come at a cost. Wages are already rising at roughly 6%, and it will likely take more to draw workers from the sidelines. With the higher pace of wage growth, we acknowledge that higher inflation is likely to be with us for some time. 70's style runaway inflation is not our base case, but we continue to believe positioning an investment portfolio for a higher level of inflation is appropriate.  

To offset some of the labor and inflation pressures, companies have increasingly been turning to automation. Machines are increasingly carrying more of the load and driving gains in productivity. For companies selling high-tech capital goods and services, this is good news and bolds well for their future earnings. Companies utilizing these goods and services also obviously benefit from lower labor costs and more consistent and efficient operations. All things considered, we continue to like the prospects for future earnings growth. Right now, earnings growth is projected to come in at just over 5% in 2022. If we continue to see steady gains in productivity, this number is potentially overly conservative. In short, earnings can continue to drive market gains in the year ahead.  

Though the wall of worry has gotten shorter, we still have our eyes on some large bricks. One of the largest we can find is growing animosity between the US and China. Tensions are running hot as the Chinese economy finds itself running well below expectations. This has increased the pressure for Xi Jinping to assert authority at home and abroad and has resulted in increasingly aggressive policy towards Taiwan and other US allies. In our work, we have applied a higher discount rate to companies with a growth story revolving around China. In addition, we continue to believe many aerospace and defense companies are trading at a value relative to the level of geopolitical tension. We've worked to incorporate these themes into our portfolios and will continue to evaluate them as the narrative evolves.  


Preston May, CBE®
Research Analyst

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