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Will High Inflation Pull Stocks Back from Record Highs?

U. S. stocks closed the week at a record high. The better-than-expected October jobs report lifted sentiment. Reopening plays surged after Pfizer unveiled game-changing trial data for its antiviral pill in treating COVID. The Federal Reserve’s plan to taper its pandemic aid was just what investors expected.

The Labor Department said the U.S. economy created 531,000 jobs in October, exceeding economists 450,000 forecast. The unemployment rate fell by 0.2% from September to 4.6%. The report, however, stoked inflation concerns with wages rising 4.9% year over year. The Labor Department also raised its job creation estimates for September and August to lift investor sentiment on the economy.

Pfizer said data from trials to evaluate its antiviral drug for COVID show an 89% reduction in the risk of hospitalizations or death. The promising data shown by this oral pill fueled hope of further economic reopening. Shares in the travel and entertainment group soared on the news.

The Federal Reserve finally made its long-anticipated announcement to slow the $120 billion monthly bond purchases implemented during the pandemic. The Fed said it will begin tapering bond purchases by $15 billion a month to end them by the middle of 2022. This pace and timeline for reducing bond purchases were in line with investors’ expectations.

For the week ending November 5, the S&P 500 (SPY) rose 2.0%. Nine of the 11 sectors gained.

Sector returns for the week ending November 05, 2021

Leaders and laggards for the week ending November 05, 2021.

Consumer discretionary (XLY), information technology (XLK), and materials (XLB) outperformed the S&P 500, gaining 3.2% or more.

Health care (XLV), financials (XLF), and utilities (XLU) lagged the benchmark.

Market breadth was positive. The number of advancing stocks in the S&P 500 led the number of decliners by a 7-to-3 ratio.

The S&P 500’s top 10 winners included communication service, consumer discretionary, information technology, materials and real estate companies.

1. Information Technology

Arista Networks (ANET) +31% – The cloud data center networker was the top performer in the S&P 500 for the week. Arista Networks posted better-than-expected third-quarter results. It also announced a 4-for-1 stock split and a new $1 billion share buyback program.

Three semiconductor chipmakers featured among the top 10 winners. Qualcomm (QCOM) and Microchip Technology (MCHP) rose 23% and 16%, respectively, after reporting quarterly results. Nvidia (NVDA) gained 16% from excitement over the chipmaker’s metaverse strategy expected this week.

2. Communication Service

Live Nation Entertainment (LYV) +22% – The concert promoter forecasted a record 2022 expecting COVID vaccines and treatments to spur fans to return to live events. The positive trial data reported by Pfizer and broad strength in the leisure & entertainment group also gave Live Nation shares an added boost.

Telecom service provider Lumen Technologies (LUMN) rose 19% after the company showed signs of turning around. It reported cash flow robust enough to maintain its dividend and buyback $1 billion in shares.

3. Materials

FMC Corp. (FMC) +17% – The agricultural chemicals producer topped analysts’ third-quarter sales and EPS forecasts by 2% and 8%, respectively.

Specialty chemicals & materials maker DuPont de Nemours (DD) rallied 16%. DuPont is buying engineered materials manufacturer Rogers Corp. (ROG) for $5 billion. The deal gives DuPont entry into high growth markets such as electric vehicles, 5G technology, and clean energy.

Other Top 10 Winners
The S&P 500’s top 10 winners for the week included:

  • Cruise operator Royal Caribbean (RCL) +15%
  • Shopping mall REIT Simon Property Group (SPG) +16%

Top ETFs for the week

The following ETFs themes worked well: airlines, small-cap value, uranium, semiconductors, and transportation. The top ETFs for the week include:

  • U.S. Global Jets ETF (JETS) +10.8%
  • Pacer US Small Cap Cash Cows 100 ETF (CALF) +9.3%
  • North Shore Global Uranium Mining ETF (URNM) +9.2%
  • iShares Semiconductor ETF (SOXX) +8.8%
  • SPDR S&P Transportation ETF (XTN) +8.0%

Top Fidelity Fund for the week

  • Fidelity Select Semiconductors (FSELX) +11.4%

Looking ahead to the week of November 08

Financial markets will focus on inflation this week. Investors get wholesale- and retail-level inflation readings along with comments from Federal Reserve officials. Investors also get their first opportunity to react to the passage of the infrastructure bill. A few high-profile earnings reports are in store.

* Last week, the October jobs report kindled inflation worries after wages showed a 4.9% increase in the past year. Investors will get reads on wholesale and retail inflation this week. According to Briefing.com, economists expect the producer price index and the consumer price index to rise 0.6% each. Some economists believe consumer inflation could show the highest year-over-year jump in 30 years.

* Investors are likely to hear the views of individual Federal Reserve officials on inflation. Chairman Powell, Vice Chairman Clarida, and the New York & San Francisco Federal Reserve Presidents speak this week.

* The financial markets get their first opportunity to react to the passage of the infrastructure bill. After months of delay, the House passed this $1.2 trillion bill over the weekend. President Biden should sign the infrastructure bill already approved by the Senate. Investors will also monitor progress on Biden’s social spending bill that lacks the Senate’s support.

* The third-quarter earnings reporting season is winding down. Disney and PayPal are the mega-cap S&P 500 companies reporting this week. Investors will also get to hear from homebuilder D. R. Horton and food distributor Sysco.

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