Wall Street: Will the Relief Rally Continue?

Wall Street was in a rally mode in the second part of the week, following a dovish FOMC statement on Wednesday afternoon regarding tapering and inflation.

As expected, the monetary policy-setting committee of the nation’s central bank announced that tapering, the rolling back of its pandemic bond-buying program, will begin at the end of the month. Yet the pace will be gradual, depending on inflation, which the Fed continues to believe is transitory. Interestingly, an announcement by the Bank of England on Thursday morning was on the same page as the FOMC on inflation.

A Relief Rally

The FOMC statement was music to the ears of traders and investors, as it indicates that the Fed is serious about fighting inflation and that tapering isn’t going to turn into tightening (raising short-term interest rates) any time soon. Thus, there was a big rally in all major equity indexes on Wednesday afternoon.

A Rebounding Labor Market Adds Fuel to the Rally

Meanwhile, Wall Street’s relief rally got a big boost from a host of data indicating that the U.S. labor market is rebounding from the pandemic recession. For instance, the ADP report published on Wednesday morning showed that the nation’s private businesses hired 571,000 workers in October of 2021, up from 568,000 in September and ahead of market expectations.

Moreover, on Thursday, the U.S. Bureau of Labor Statistics (BLS) reported that the number of jobless people who had filed for unemployment benefits declined to 269,000 in the week ending October 30 of 2021, from 283,000 in the previous week.

Then on Friday, the U.S. Bureau of Labor Statistics (BLS) reported that in October, the U.S. economy added 531,000 new jobs, up from 312,000 jobs in September and ahead of market expectations of 450,000 jobs.

Most of the job gains were in the service sector, suggesting that the U.S. economy may be in the middle of a transition from commodities to services. Also, it confirms that the resurgence of inflation in recent months may, indeed, be transitory, confirming the Fed’s thesis.

Relief Rally Could Carry On Next Week

Weeks with significant market moves are usually followed by profit-taking, as investors re-assess equity valuations. However, profit-taking could be limited next week, for a couple of reasons. One of them is the Congressional approval of the infrastructure bill, which is a tailwind for raw material stocks that lagged the overall market last week.

The other reason is a good earnings reporting season, which has been getting even better, according to FactSet, which keeps weekly tallies of listed companies’ earnings reports.

“At this point in time, more S&P 500 companies are beating EPS estimates for the third quarter than average, and beating EPS estimates by a wider margin than average,” says FactSet. “Due to these positive surprises, the index is reporting higher earnings for the third quarter today relative to the end of last week and relative to the end of the quarter. The index is now reporting the third-highest (year-over-year) growth in earnings since Q2 2010.”

Moreover, the situation could grow even better in the fourth quarter. “Analysts also expect earnings growth of more than 20% for the fourth quarter and earnings growth of more than 40% for the full year,” adds FactSet. “These above-average growth rates are due to a combination of higher earnings for 2021 and a more straightforward comparison to weaker earnings in 2020 due to the negative impact of COVID-19 on a number of industries.”

The Bottom Line

Wall Street lives in the best of both worlds these days: a low-interest-rate environment assured by a dovish Fed, and solid earnings secured by a rebounding economy. Nonetheless, investors should cast a wary eye on valuations, which are growing hefty in some market areas.

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