As firms increased hiring, a measure of U.S. services industry activity surprisingly surged in November, setting a new record high. Still, there was no evidence that supply bottlenecks were easing, and prices remained high.
On Friday, the Association for Supply Chain administration said that its non-manufacturing activities index rose to 69.1 in November, up from 66.7 in October, marking the highest level since the season started in 1997. A score of greater than 50 implies that the services sector, which accounts for more than two-thirds of total economic activity in the United States, is expanding.
The index was expected to dip to 65 by economists surveyed by Reuters. They combined the survey’s findings with statistics on consumer spending, the job market, and manufacturing to create a positive economic picture. COVID-19’s Omicron version, on the other hand, poses a threat to the future.
From 51.6 in October, the ISM’s index of services industry employment surged to a seven-month high of 56.5. This gave hope that a pandemic-related labor shortage, which has stifled faster employment growth, would be easing.
Last month, services businesses made headway in lowering the backlog of incomplete work, thanks to increased employment levels. Overall, supply restrictions were still in place. At a high of 75.6, the survey’s gauge of supplier deliveries remained steady. Slower deliveries are indicated by a value exceeding 50%.
The unexpected increase in the services index was due to longer delivery delays. They’re usually linked with a healthy economy and greater client demand, so they’d help boost the ISM non-manufacturing index. On the other hand, slower supplier deliveries imply persistent pandemic-related shortages in this case.
The survey’s gauge of prices paid by service businesses fell from 82.9 in October to 82.3 in November. Last month, a measure of new orders received by service firms hit a fresh high of 69.7.
For confident investors, the Fed’s aggressive approach makes value equities more appealing:
As predictions build that the Federal Reserve will focus on battling inflation, several investors are preparing for a hawkish turn by purchasing the cyclical financial equities they attracted earlier this year.
The spread between growth and value stocks, including banks, financials, and energy businesses, has changed throughout the year, owing to wagers on how soon the Federal Reserve will normalize monetary policy.
Indications that the central bank might act more rapidly than usual in the face of growing consumer prices have battered growth and technology businesses in recent days. That has also been rattled by broader market volatility brought on by worries of the Omicron coronavirus spreading.
Simultaneously, some investors have raised their bets on “value” stocks, thinking they will perform better under a tighter monetary policy environment. As the U.S. economy reopened in 2021, such stocks soared at first but subsequently collapsed as investors shifted their focus to tech firms.
“The Fed is the one who delivers the punch bowl and the one who takes it away,” said Michael Antonelli, a Baird strategist. “Markets are rapidly reprising their future expectations.”
As per CME’s Fed Watching tool, derivatives on the federal funds rate, which measure short-term interest rate expectations, showed a roughly 50% possibility of the Fed raising rates from its current near-zero level by late May. Nearly 31% of the population was jobless in early November.
Those wagers are being driven by comments from Fed Chairman Jerome Powell, who said earlier this week that the central bank would likely recommend speeding up the unwind of its $120 billion-per-month government bond-buying program at its next meeting.
According to Powell, the phrase “transitory” no longer applies to the current high inflation rate.
Growth stocks were hit by stronger-than-expected components of Friday’s U.S. jobs report, confirming the concept of a more hawkish Fed.
The Ark Innovation ETF, which beat all other U.S. stock funds, last year owing to huge bets on those so stay-at-home firms, was one of the sufferers. The fund’s shares fell 5.5 percent to a 13-month low on Friday, owing to significant drops in several of the stocks it owns.
In the first three days of December, the Russell 1000 Growth index has lost 2.4 percent, while its value-oriented equivalent has gained over 0.9 percent. Year to date, the index is up 21.1 percent and 16.6 percent, respectively.
The community’s components are starting to reflect a quicker rate increase cycle. The reasonably long growth stocks are selling down, said Harbor Capital Advisors’ Spenser Lerner, head of Multi-Asset Solutions.
Higher rates, which may develop due to expectations for more aggressive Fed policy, can put even more pressure on high-value tech and growth companies, as they threaten to devalue their longer-term cash flows.
At the same time, a more robust economy favors value and cyclical equities, implying that the Fed should tighten monetary policy?
Lerner is concentrating on high-quality, cyclical U.S. large-cap firms that do not trade at exorbitant valuations and will profit from what he anticipates to be continued dollar appreciation as the Fed approaches rate hikes.
The release of the consumer price index and current inflation estimates on Friday will be among the data points scrutinized by the Fed this week.
Powell’s willingness to accelerate the Fed’s tapering program, according to Garrett Melson, portfolio strategist at Natixis Investment Managers Solutions, would likely increase volatility in the coming months as markets prepare for the potential of higher rates. He believes that the Fed’s reduction of assistance will boost oil and banking stocks sooner rather than later.
Not everyone thinks the Fed will raise interest rates in 2022. A senior financial planner at NFJ Investor Group, Burns McKinney, believes the Fed will wait until 2023 to strengthen policy and test the economy’s soundness without monetary assistance after unraveling its bond-buying program.
In this case, the Fed may allow inflation to remain high for months, bolstering the specific instance for investing in cyclical companies like Lockheed Martin Corp and Honeywell International Inc. They have a background of dividend payments and may benefit from the Democracy infrastructure deal that passed Legislature in early November. “All of us would have discarded the phrase ‘transitory’ if the Fed hadn’t,” McKinney added.
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