At a glance
A modest labor market recovery and slowing growth expectations pressured equities last week.
U.S. Bank Global Health Check
The U.S. Bank proprietary Global Health Check incorporates more than 1,000 data points — including business climate factors and economic sector categories for 22 major economies representing 80 percent of total global wealth — to reflect our view of the current strength of worldwide economic growth.
Number of the week:
The percentage of S&P 500 companies within the Utilities, Real Estate, Consumer Staples and Energy sectors offering dividends yielding more than the 10-year Treasury.
Term of the week:
Dividend – The distribution of some of a company's earnings to shareholders, as determined by the company's board of directors. Dividends may be paid out as cash or in the form of additional stock.
Quote of the week:
“Dividend-paying equities are relatively attractive over select fixed income alternatives, helping support equity prices. At present, 48 percent of S&P 500 companies offer dividends yielding more than the 10-year Treasury yield of 1.3 percent. Notably, more than 75 percent of companies within the Utilities, Real Estate, Consumer Staples and Energy sectors do so.”
― Terry Sandven, Portfolio Manager, Chief Equity Strategist, U.S. Bank
- Employers have massive unmet demand for labor as trepidation around return to work remains. Specifically, a U.S. Labor Department report shows record job openings, even though the improvement in unemployment claims is very slow. Job openings may decline as enhanced unemployment benefits end and employers offer improved wages and benefits. However, the latter could lift inflation for longer.
- Producer prices continue to accelerate, driven by labor, aluminum, natural gas and freight rates. The faster pace of inflation is concerning if business profit margins fall or price increases damage consumer spending.
- Foreign developed economies appear past peak acceleration, judging by European sentiment data. An upcoming German election and European Central Bank pivot to more neutral monetary policy adds to greater uncertainty about the forward path. Meanwhile, China’s heavy-handed approach to coronavirus outbreaks has the impact of creating softness during lockdowns and near-term acceleration in activity when reopening occurs. Because of this, China’s softening economy and markets may stabilize. Finally, a conversation between President Biden and Chinese President Xi Jinping shows the two countries could thaw relations, reducing some geopolitical uncertainty.
- Equity performance last week was negative, but no obvious catalyst triggered the modest pullback. On balance, a “wall of worry” looms on the horizon over a potential slowing in the trajectory of earnings growth, the ongoing impact of COVID variants on the pace of economic growth and proposed changes to existing monetary and fiscal policies.
- Year-to-date performance remains superb and broad-based. The S&P 500 is up 18.7 percent as of Friday’s close, with all 11 sectors in positive territory and nine up 12 percent or more. Both cyclical and longer-term secular-growing sectors exhibit strong performance. Broad-based strength is one indicator pointing toward higher prices. Additionally, the S&P 500 closed Friday above key areas of technical support. By these metrics, we consider last week’s pullback within the normal ebb and flow of an upward trending market.
- Third quarter results and forward guidance are among upcoming catalysts. Both the S&P 500 and earnings are near all-time highs. At present, consensus earnings estimates for 2021 and 2022 are approximately $202 and $220 per share, respectively, according to Bloomberg, FactSet Research Systems and S&P Global. Accordingly, the index trades at roughly 22 times 2021 estimates and 20 times 2022 estimates, levels we deem elevated yet short of extremes. The third quarter reporting period unofficially begins during the week of October 11.
- Equities remain an alternative for income-oriented investors. Dividend-paying equities are relatively attractive over select fixed income alternatives, helping support equity prices. At present, 48 percent of S&P 500 companies offer dividends yielding more than the 10-year Treasury yield of 1.3 percent. Notably, more than 75 percent of companies within the Utilities, Real Estate, Consumer Staples and Energy sectors do so.
- Multiple Fed officials commented on their desire to start reducing bond purchases. Next week’s Fed meeting could hold important guidance around how it will structure asset purchase reductions, although a formal announcement is more likely at the November meeting. The European Central Bank announced upcoming asset purchase reductions last week. If inflation and hourly earnings measures released this week are higher, it would bolster the case for the gradual removal of policy accommodation.
- August concluded another month of below-average corporate bond defaults. Moody’s, a credit rating agency, reported only two U.S. corporate bond issuers defaulted in August, well below the long-term monthly average. High cash flows, increasing revenue growth and the low cost of debt are improving corporate issuers’ ability to pay their debts. This can be seen in Moody’s benign global default rate forecast of 1.9 percent over the next 12 months. We’re encouraged by low default frequencies and consequently prefer increasing credit risk in corporate bonds. High yield municipal, bank loans, and non-agency mortgages offer a similar opportunity to increase current income while credit fundamentals are strong.
- Real Estate trailed the S&P 500 by 2 percent last week, with healthcare and office properties leading. Data centers and hotels led the decliners, although all property types were negative on the week. Performance in the sector continues to oscillate between the cyclical recovery themes and the secular growers. Real Estate has been the best-performing sector in the broader market this year, but it appears concerns about slowing growth and the removal of Fed policy accommodation started to take its toll last week.
- Crude oil prices rose by 1 percent last week. Catalysts for the move were further declines in domestic crude and gasoline inventories, although those declines are still related to Hurricane Ida. Energy sector equities traded in line with the S&P 500 and have outperformed the broader market by 9 percent in 2021.
Recommended for you