US stock market hits new high on strong economic data despite inflation concerns

With the robust retail sales read and the unemployment rate has now fallen to a new pandemic-low of 4.6% along with solid earnings from US companies, the US stock market rallied to a new high after the correction in September caused by inflation fears. It seems like inflation isn’t standing in the way of consumers. Despite some hiccups on the labor market and inflation fronts, this could serve as the vote of confidence investors needed signaling that the economy is still chugging along nicely. 

The Federal Reserve garnered headlines with the announcement that it will be gradually reducing its massive monthly purchases of bonds. Speculation was rife over the impact the removal of this alleged stimulus would have on the economy. 

Economists are also coming around to acknowledging that inflation may be here to stay after October's relatively alarming reading, with underlying pressure showing resilience - particularly in goods spending and supply chain price shocks with consumer price data showed that inflation rose at +6.2% YoY.

This month's gains came on the heels of the Federal Reserve finally announcing it is ready to begin winding down its latest QE program. The Fed will taper its current $120 billion monthly buying pace by reducing Treasury purchases by $10 billion a month and mortgage-backed securities by $5 billion. 

The Russell 2000 of small-caps closed at a record high as well, with a strong earnings season acting as a tailwind for positive sentiment in equities.

The European markets also rallied from the Sep correction though it underperformed the US markets. In the meantime, the Emerging Markets remains in doldrums concerns of the slow down of the China economy and problems with highly indebted property developers, along with many other emerging economies still in the throes of a COVID lead recession, due to the slower vaccination cycle.

Portfolio Performance and Strategy

The adjustment of the portfolio in August where we reduce our weightage of Emerging Markets from 30% to 10% has helped to improve on the portfolio returns as the focus on US and European markets are paying off in the recent market rally. 

I expect the market to rally into the year end with the next possible tremor coming from the unfolding events of the tightening monetary and inflation news coming out from US. Meanwhile, we will maintain our low exposure to Asia and watch out for the rippling effects on the potential default of the property developers in China.