Market Poised for Strong 4th Quarter, But Headwinds Are Present

Weekly Market Recap

The fourth quarter is historically a strong quarter for the S&P 500 Index. When we look back since 1950, the S&P 500 has been positive in the 4th quarter 79% of the time.

The average return for the 4th quarter since 1950 is +4.03%. This, plus the fact that 3rd quarter earnings look to be strong, sets up for a nice 4th quarter.

However, there are headwinds that do pose a threat to growth. The shipping bottleneck and labor shortages are threatening businesses and consumers alike. To be clear, these issues were not created by random external forces, but by terrible policy decisions - shutting the U.S. economy down in 2020, no solid plan to re-open in 2020-21, dependence on export business, and extended pandemic unemployment benefits. If these bad policy decisions were avoided, perhaps we would be experiencing a booming economy. As we stand here today, the U.S. economy is still trying to recover.

Last week's economic releases were not all bad, but the September print of Consumer Prices and Producer Prices was not good news. The CPI was higher in September by 0.4%, which exceeded analysts' expectations of 0.3%. PPI came in just under analysts expectations, but still rose by 0.5%.

As commodity prices have moved higher and shipping costs have increased, it's only a matter of time before producers begin to pass along the bulk of increased costs to consumers. On the labor front, there was good news that Continued Claims declined by 134,000. Since the extended pandemic benefits ended, Continued Claims have declined 10%. That's a good start, but we need to see those numbers continue to drop.

The U.S. consumer is a bit of a conundrum at the present. Retail Sales not only exceeded analysts' expectations, but were positive for September. The market had expected Retail sales of -0.2% for the month, but the actual number was +0.7%. The preliminary reading on Consumer Sentiment, however, came in lower at 71.4, down 1.4 lower than last month's reading. The IPSOS Consumer Sentiment Index followed suit, with a lower reading month-over-month. To be sure, the shipping bottleneck threatens retail sales for the holiday season, which one would ordinarily expect to be strong with high consumer demand.