By Ben Norris, CFA, Securities Research Analyst, Associate Vice PresidentPrint This Post
Are markets beginning to find some stability? Possibly even a bottom? Stocks notched gains last week for the first time in nearly a month. This comes after the S&P 500 (SPX) posted three straight quarters of losses for the first time since 2009. For the week SPX gained 1.6% while the Dow Jones Industrial Average (DJIA) and NASDAQ Composite (COMP) gained 2.0% and 0.7% respectively. Gains were solid but likely seem modest to anyone that watched markets closely on Monday and Tuesday last week.
Monday was the first trading day of the fourth quarter of 2022 and things got off to a strong start. SPX gained 2.6% on the day as the Institute of Supply Management’s manufacturing index fell to 50.9 vs. the 52.3 expected and the 52.8 recorded in August. A reading of more than 50 indicates that activity is expanding, but the latest reading hints that U.S. economic activity might be slowing. Underlying data showed that conditions might not be quite as strong as the headline number indicates. The index of new orders fell below 50 for its lowest reading since May of 2020. In other economic news, construction spending fell 0.7% in August vs. an expected decline of 0.2% and the prior months data was revised lower as well – another indication of weakening economic conditions. The market took these developments as good news in hopes that the Fed would end their rate hiking campaign prematurely in efforts to avoid a deep recession. Bond yields fell sharply on Monday as a result.
Tuesday saw similarly strong market action as bond yields fell once again – this time triggered by a central bank other than the Fed. The Reserve Bank of Australia announced a smaller than expected interest rate hike which led investors to believe that interest rates rate increases outside of the U.S. could be coming to an end in the near future. The Job Openings and Labor Turnover Survey (JOLTS) was also released on Tuesday and showed that job openings declined by more than 10% between July and August. Still there are more than 10 million available jobs according to the survey. On one hand, it looks like the hot labor market might finally be cooling off, but on the other, 10 million job openings is still an historically elevated number. Similarly, the job quits reading actually increased from its prior figure which is a pretty strong argument that employees feel good about their position in the labor market. If employees have the confidence and opportunity to change jobs, odds are that the Fed will still have some work to do to get the labor market where they want it. A cooling labor market is one of the most important things investors have been watching for as they look for a pivot to less aggressive policy from the Fed.
Wednesday and Thursday were relatively quiet days compared to the rest of the week. Wednesday saw stocks close slightly lower with SPX losing 0.2%. The most impactful developments on Wednesday were new employment data from ADP and comments from San Francisco Fed President Mary Daly. ADP’s employment report drew slight contrast to the prior day’s JOLTS as it showed that hiring activity in the private sector picked up in September and August’s numbers were revised higher as well. Annual average compensation increased nearly 8% year-over-year which led to renewed worries of stubborn inflation and continued rate hikes. Mary Daly wasn’t much help when she indicated that the Fed has no plans to change course in their fight to get inflation under control. As a result, the market’s expectations for another 0.75% rate hike in November rose sharply last week. Stocks were down moderately on Thursday as SPX lost 1%. Another Federal president, this time Chicago’s Charles Evans, gave comments indicating that the Fed’s target interest rate could rise to 4.5-4.75% by mid-2023. The current target rate is 3.0-3.25%.
Friday was once again a no-good very bad day for investors as stocks plunged into the weekend. SPX lost 2.8% as investors digested mixed-to-positive employment data – we’ve established that for the time being good news is bad news when it comes to the labor market and the Fed. Fridays have been particularly rough for stocks lately. You have to go back to September 9th to find a Friday where SPX logged a gain. There are probably a variety of reasons for the recent spate of bad performance on Fridays. One is partially that weekly jobless claims have been watched particularly closely lately and they happen to be released on Thursday. At the same time, our feeling is that many investors may be nervous holding their positions through a weekend given the amount of uncertainty around the world – whether it be geopolitical tensions, central bank policy changes, or macroeconomic developments. A few more Fridays like that last few and investors might take up a new mantra ONIF – Oh no it’s Friday.
I would be remiss if I didn’t mention the very strong performance for Energy stocks last week. Crude oil prices surged more than 10% last week after OPEC+ opted to cut oil production (despite apparent pleas from the Biden administration) and the Energy sector gained 14.5% as a result. Oil and the Energy sector have been weak recently but remain two of the best performing assets classes in 2022.
Looking ahead, investors will be eager to dig through the Fed’s FOMC minutes which are scheduled to be released on Wednesday afternoon. Thursday will bring the next reading of the Consumer Price Index (CPI) which will likely cause some market movement.
|NFIB Small Business Index||91.8||91.8|
|NY Fed 5-year Inflation Expectations||2.0%|
|Wednesday 10/12/2022||FOMC Minutes Released|
|Producer Price Index (PPI)||-0.1%||0.2%|
|Initial Jobless Claims||219K||225K|
|Continuing Jobless Claims||1.36M|
|Consumer Price Index (CPI) y/y||8.3%||8.1%|
|Core CPI y/y||6.5%||6.3%|
|Import Price Index||-1.0%||-1.1%|
|UMichigan 5-year Inflation Expectations||2.7%|
|UMichigan Consumer Sentiment Index||58.6||59.0|
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Weekly Market Commentary/Market