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Daily Capital

Markets: Welcome to the Metaverse

Capital Markets Perspective brings you what to watch in the markets this week, published in partnership with Great-West Investments.

Week in Review

October 25 – October 31

My nominee for the creepiest Halloween costume of the year: MetaMan.

Let me explain. I think most of us would agree that once you get past the age of twelve, the best thing about Halloween is the opportunity to put on a mask and pretend you’re someone else for a little while. (Well, that and leftover Kit-Kats. I still really like Kit-Kats.) But eventually November 1st rolls around, you take off the mask and stop being a superhero, a werewolf, Joe Manchin, or whatever else you decided to dress up as and get back to being who you were before the holiday.

At least that’s how it works for most of us. Not so much for Mark Zuckerberg and his merry band of Meta-mites, who announced last week that they were donning a new mask and permanently changing the name of their company, Facebook, to “Meta.” That’s supposed to be a nod to the company’s focus on the “metaverse”, a landscape that us luddites might describe more simply as “Internet 2.0.” By at least one description, the Metaverse is a future where we all get the opportunity to play dress-up on a semi-permanent basis and roam a virtual/augmented realityscape dressed in the skin of an avatar of our own choosing, free to play, shop and otherwise interact as a collection of bits and bytes rather than mere cells and organic material.

Whether or not that sounds mildly dystopian to you is probably a function of when you were born. But for those of us who were born before Al Gore invented the internet, it feels just creepy enough to let a little skepticism to leak in and cause us to question Mr. Zuckerberg’s motives as something a little less than visionary. Could, for example, this aggressive re-branding of Facebook be an attempt to distract people from issues the company is currently dealing with, such as Apple’s decision to revamp it privacy rules in a way that could threaten portions of the company’s advertising business, or criticism that politics and profits are interacting with business in ways that are less-than-healthy for society? Or maybe it’s even more mundane than that: the company’s third-quarter earnings results released last Tuesday weren’t exactly next-generation strong, and its forward-looking guidance was hardly visionary[1]. The stock reacted to that miss exactly the way you’d expect it to: by dropping. But when the company donned its Meta-mask two days later, it recovered that lost ground (and, at least by Monday morning, then some.)

Or maybe Facebook’s re-brand is a symptom of something even bigger than that: maybe it’s an acknowledgement that the so-called FAANGs are suddenly becoming a little less relevant as the center of the investment universe and have to work harder to inspire markets than they did during the worst of the pandemic. As evidence of that, the FAANGs underperformed the S&P 500 Index for the first two weeks of earnings season on an equal-weighted basis in spite of being that benchmark’s weighty and high-growth standard-bearers. And they probably would have done so again last week if it had not been for a convincing beat by perhaps the “fang-iest” FAANG of all: Google (aka “Alphabet.”)  Either way, other FAANG earnings last week weren’t quite as inspiring as Alphabet/Google’s: Apple hid behind an estimated $6b or so in supply chain impacts when it delivered a disappointingly in-line quarter, while Amazon stumbled badly relative to estimates (proving, in the process, that online retail isn’t immune to supply chain and logistics challenges as well as some of the other things currently pressuring brick-and-mortar retailers.)

Also of potential interest: while Alphabet/Google’s post-earnings performance was great, it was outpaced by none other than smelly old smokestack-heavy Ford during the session following its earnings release last week, impressing investors by upping its outlook even while warning that the auto industry’s well-documented supply chain issues might persist into 2023[2]. Could that be another sign that old-economy grime is finally getting the upper hand over meta-economy flash? (With the Facebook/Meta re-brand, I understand the “F” in “FAANG” is now up for grabs, and “MAANGs” just doesn’t have the same ring to it – I wonder of Ford’s PR department is paying attention…?)

Meanwhile, someone else who probably wishes he could permanently re-brand is President Joe Biden. That’s because his signature spending program lost some serious weight last week, going from an estimated $3.5 trillion in prospective spending down to somewhere in the neighborhood of $1.75t[3], owing primarily to pressure from moderate members in his party’s own caucus: Democratic Senators Joe Manchin and Kirstin Sinema. While partisans and progressive policy wonks were probably disappointed by the compromise, markets can’t afford to be so dogmatic and naturally took a more pragmatic approach: downsizing aside, the combined impact of “Build Back Better” and a bipartisan infrastructure bill of lesser (but still significant) size, still represents an enormous amount of potential fiscal support for the economy just as pandemic-related transfers are waning in earnest. That, as much as anything else, probably helped equity markets to their modest-to-moderate gains last week.

Speaking of waning support for consumers, Friday’s income and outlays report confirmed exactly that: personal income declined by 1%, mostly the result of a big decline in social benefits paid to individuals[4]. People continued to spend, though, with personal consumption expenditures (or “PCE”) up 0.6% as Americans continued to spend down surplus savings amassed during the COVID lockdowns. Both numbers were in the ballpark relative to estimates, as was the PCE price index, the release’s inflation figure.

In fact, most of last week’s economic data was comfortably less-than-surprising: home price data from the FHFA[5] and S&P/Case-Shiller[6] suggested that home prices aren’t really accelerating anymore, while pending home sales data from the National Association of Realtors[7] showed falling volumes and “signs of a calmer price trend.” Those are positives if you were among those who were starting to worry about a housing bubble and certainly consistent with the now-consensus belief that housing is cooling off.

Other data were similarly constructive, even if not surprisingly so. Initial jobless claims came in under 300,000 again (yay!), and the Dallas, Richmond and Kansas City regional Fed manufacturing reports were all mild surprises to the upside[8]. Both consumer confidence reports were also slightly ahead of expectations, including Tuesday’s Conference Board consumer confidence report (which booked its first gain in four months,) as well as Friday’s University of Michigan Consumer Sentiment report, which highlighted rising income expectations as an important offset against inflation fears and skepticism about the direction of federal policy as the reason for a very slight improvement in that index[9],[10].

Which brings us to our final stop on the economic data Ferris wheel: employment costs. If the UofM’s survey confirmed that consumers are feeling better about their future income prospects, businesses are perhaps not as thrilled by it: last week’s lone disappointment in the data was a faster-than-expected acceleration in employment costs[11], and while it was driven by outsized gains in areas that aren’t altogether surprising – like services, leisure and hospitality – the rising costs of keeping employees employed echoed a consistent theme in earnings reports, survey data and just about everywhere business leaders are given a microphone. If inflation is destined to become anything other than transitory (and if margin pressures identified by the handful of consumer staples companies that reported earnings last week are to persist), it will show up here first and could lay the groundwork for economic trouble in the future.

So where does that leave us? Even if the US economic recovery isn’t donning a mask and permanently re-branding itself, it may nonetheless be undergoing a makeover of sorts. Whether it’s acknowledgement that the formerly white-hot housing market is now cooling, or that monetary support is giving way to fiscal, or that stratospheric post-COVID rebound is cooling into something more sustainable or simply that the FAANGs (“MAANGs?”) are quietly stepping out of the spotlight, it seems clear that the nature of the current expansion is changing in ways that aren’t altogether unexpected. And while things like accelerating labor costs are concerning, that’s probably not a bad thing on the whole.

What to Watch This Week

November 1 – 7

Notable economic events (November 1 -5)

Monday: PMI/ISM manufacturing

Tuesday: FOMC begins

Wednesday: Fed announcement, ADP Payrolls, PMI/ISM services; Bank of England rate decision

Thursday: Challenger layoffs, weekly jobless claims

Friday: Payrolls

It takes a lot to upstage the Bureau of Labor Statistics’ monthly payrolls report, but if anyone is capable of doing exactly that, it’s Jerome Powell. Market attention will be focused squarely on the Chairman and his pals at the Fed on Wednesday, when they will almost certainly provide a tangible game plan concerning the tapering of the $120b in treasury — and mortgage bonds they’ve been buying every month since the pandemic began.

To be clear, it’s their ballgame to lose: markets have seemed to grow quite comfortable with the idea that the taper will start before Thanksgiving and progress incrementally through the middle of next year, before purchases drop to zero sometime around mid-June. As long as they stick to that script (and avoid leaving the impression that rate increases are a foregone conclusion shortly thereafter,) then things should be fine. Nonetheless, expect the world to revolve around the FOMC this week.

But its also hard to fully separate the FOMC’s decision from this week’s trio of labor market reads. That’s because Powell has gone out of his way to link progress in the jobs market tightly to the future direction of Fed policy. If Friday’s payrolls report (or the two that precede it, ADP on Wednesday and Challenger layoffs on Thursday) do anything to alter the perception left by declines in weekly unemployment claims that labor markets are healing slowly but surely, then the FOMC might be compelled to switch the script. And markets wouldn’t like that one bit.

It might be tempting to assume that the Fed is the only Central Bank that matters, but in reality they all matter. The monetary response to the COVID pandemic (and, to perhaps lesser extent the Great Financial Crisis before it,) would likely have been far less effective without a high degree of coordination between the Fed and its peers at the European Central Bank, the Bank of England, the Bank of Canada, the BOJ and so forth. But while that coordination existed on the way down, it’s far less certain whether the world’s most influential central banks are willing or able to coordinate their interest rate policies on the way up. One of the clearest test cases of that so far will take place on Wednesday when the Bank of England – who seems to be far more worried about inflation in the UK than the Fed is about inflation here in the US – releases its decision on rates. If the BoE does indeed push rates higher, the market’s reaction might be a reasonably good petri dish for how markets might react on the inevitable day when the Fed finally lifts rates off the zero floor.

Other than the Fed decision and a week’s worth of jobs data, the other things to watch include final reads on September Purchasing Managers’ Indexes and the Institute of Supply Management’s ISM reports. We’ll get the manufacturing versions of those reports on Monday and the services versions on Wednesday. Like earlier editions (and dozens of other like-minded releases before them,) you should probably expect those reports to show an economy that’s managing to grow – albeit more slowly – in spite of near-historic cost- , labor- and logistics challenges. This month’s ISM- and PMI reports will only be notable if they say something different from that.

And finally, this week will represent the peak of third-quarter earnings season – at least in terms of the number of companies reporting. There will be nearly 1,000 companies on the wire on Wednesday and Thursday alone, and while its true that the real attention-grabbers have already released third quarter results, it remains true that each and every company who reports results to investors contains at least a nugget of relevance to the environment writ large. Investors usually ignore those anecdotes at their peril.

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Personal Capital Advisors Corporation (“PCAC”) is a wholly owned subsidiary of Personal Capital Corporation (“PCC”), an Empower company. PCC and Empower Holdings, LLC are wholly owned subsidiaries of Great-West Lifeco Inc. Source for index data: Bloomberg.com; GWI calculations.

 

[1] Zacks.com, Bloomberg and company reports.

[2] Ibid.

[3] https://www.whitehouse.gov/briefing-room/speeches-remarks/2021/10/28/remarks-by-president-biden-announcing-the-framework-for-his-build-back-better-agenda-and-bipartisan-infrastructure-bill/.

[4] https://www.bea.gov/news/2021/personal-income-and-outlays-september-2021

[5] https://www.fhfa.gov/AboutUs/Reports/ReportDocuments/FHFA-HPI-Monthly-10262021.pdf

[6] https://www.spglobal.com/spdji/en/indices/indicators/sp-corelogic-case-shiller-20-city-composite-home-price-nsa-index/#overview

[7] https://www.nar.realtor/newsroom/pending-home-sales-dip-2-3-in-september

[8] https://www.dallasfed.org; https://www.richmondfed.org; https://www.kansascityfed.org

[9] http://www.sca.isr.umich.edu/

[10] https://www.conference-board.org/data/consumerconfidence.cfm

[11] https://www.bls.gov/news.release/eci.t02.htm

The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting or investment advice. You should consult a qualified legal or tax professional regarding your specific situation. Keep in mind that investing involves risk. The value of your investment will fluctuate over time and you may gain or lose money.

Any reference to the advisory services refers to Personal Capital Advisors Corporation, a subsidiary of Personal Capital. Personal Capital Advisors Corporation is an investment adviser registered with the Securities and Exchange Commission (SEC). Registration does not imply a certain level of skill or training nor does it imply endorsement by the SEC.

Thomas Nun, CFA, is a portfolio strategist for Great-West Investments.
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