What happened in the markets - 2-6 Oct 2023

Introduction

The Dow made a U-turn back into positive territory for 2023 after Friday's impressive jobs report. This comes after the Dow turned negative for the first time this year. With a potential government shutdown temporarily in the rearview mirror, investors have shifted their focus to other roadblocks that have caused stocks to swerve over the past couple of months.

Oil prices took a significant dip last week, smoothing some of the rocky road that has slowed stocks down since early August. This helped the S&P 500 break a 4-week losing streak. However, rising summer oil prices and accelerating bond yields continued to put the brakes on the Dow in particular. On Tuesday, the blue chip index turned negative for 2023. But that dip into the red for the Dow was short-lived. A blockbuster jobs report on Friday showed the US economy added a much larger-than-expected 336,000 jobs during September. This has many investors thinking the big jobs number will help drive the Fed to raise rates again later this year.

This coming week may accelerate the Fed's thinking with 2 inflation reports due out. Stay tuned, Gotraders!

Key Takeaways

The recent surge in bond yields has been dictating market moves, with rising rates leading to a pullback in stocks. This has been largely driven by strong economic data, which has sparked concerns over potential decisions by the Federal Reserve. For the time being, the path of least resistance seems to be towards higher bond yields. However, analysts believe there's a case to be made that rates could soon reach their peak. Analysts anticipate that falling inflation, a slowdown in economic growth, and the end of the Fed's rate-hiking campaign will ultimately exert a more significant influence.
Last week's jobs report for September revealed that the labor market is holding strong. Payroll growth significantly exceeded expectations and accelerated from the pace seen in recent months. This led to a jump in rates and a dip in stocks, as it did little to alleviate the cautious outlook surrounding the Fed and inflation. However, analysts see a silver lining in the further moderation of wage growth. This could be a positive signal about the future path of inflation.
This week also marks the one-year anniversary of the bear-market low in 2022. While there are many factors at play, historical trends suggest that bull markets that are a year old tend to continue growing.

Approaching a peak in interest rates

Last week, ten-year yields moved above 4.8%, a rate we haven't seen since 2007. This year, longer-term rates have shot up much higher than analysts predicted, including a 0.5% rise in just the last few weeks.

Interestingly, this recent jump in rates gives us some confidence that we may be nearing an exhaustion point. In 2022, long-term rates surged amid the powerful push from four-decade-high inflation and historically aggressive Fed-policy rate hikes. While these influences haven't completely disappeared, inflation is currently declining, and the Fed is essentially done raising rates.

Despite this, 10-year rates have climbed higher. This is likely due to the Fed's "high policy rates for longer" message and the market's recognition that a significant amount of Treasury bond supply may be needed to fund the bloated budget deficit. However, this could be a bit of an overshoot.

Interestingly, the rise in yields could actually trigger lower rates. High rates can exacerbate restrictive financial conditions and stunt economic activity, which would warrant lower rates. In other words, the cure for rising rates may be the rise in rates itself.

While bond yields may continue to rise for a while, analysts believe that falling inflation, slower economic growth, and the end of the Fed's hiking campaign will ultimately have a more significant impact. Historical data suggests that a peak in rates may not be far off. In previous instances when core inflation rose above 10-year rates, the 10-year yield declined by an average of 1.9% and the S&P 500 gained an average of 20.3% over the 12 months following the peak in rates.

10-year rates versus inflation

*Source: Bloomberg, U.S. 10-year treasury rate and core consumer price index. Past performance does not guarantee future results.*

The labor market continues to work for consumers

The September employment report indicates that the labor market is performing strongly despite challenges posed by interest rates. Last month, there were 336,000 new payroll gains, the highest figure since January. This represents an increase from the average of 190,000 over the previous three months and is double the consensus estimate for the month. As a result, the unemployment rate remained steady at 3.8%. Additionally, there has been a notable increase in the number of workers entering the labor force.

Analysts would categorize this payroll figure and the market response as "good news is bad news." This means that although the labor market is healthy, which is generally seen as a positive factor for consumers and GDP growth, the markets are interpreting it in relation to future monetary policy by the Fed. This interpretation could be a reason for the Fed to increase interest rates. As a result, yields rose and stocks declined based on this data.

One positive aspect for markets is the wage data. Average hourly earnings increased at a year-over-year rate of 4.15% in September, marking the fourth consecutive month of slower growth and the lowest rate since June 2021. Although the faster pace of job growth might suggest that the Fed should consider one more interest rate hike next month, the slower rate of wage increases should contribute to ongoing moderation in inflation.

Healthy employment conditions and the subsequent support they provide to consumer spending are long-term trends that markets should support. However, there is currently anxiety over the Fed's tight policy to control inflation, and this anxiety was not alleviated by September's jobs report, which showed higher job numbers than expected.

The main point: Analysts find it puzzling that the market is reacting negatively to positive news about the jobs market and economy. It is important to note that analysts believe this negative reaction will only be temporary and will subside if future data confirms that inflation continues to decrease while employment conditions remain stable. If this happens, the market can alleviate concerns about the Federal Reserve needing to tighten monetary policy significantly. Analysts see this as the reason for interest rates to decrease and for stocks to resume their upward trend.

Monthly Change in U.S. Nonfarm Payrolls

One year on, the market's recovery has history on its side

This week, we're hitting the one-year anniversary of the 2022 bear-market bottom. We've been echoing the same sentiment that analysts had at the start of 2023 - that the low we saw last October was likely the launchpad for a new bull market.

Looking back at previous market recoveries, once they hit the one-year mark from the cyclical low, stocks didn't revisit those lows in any instances since 1974. While we can't rely solely on inertia, it's comforting to see that market sentiment has swung back into pessimistic territory, and the reaction from equities has been a measured pullback from the summer highs, not a drastic sell-off.

Analysts are not expecting a smooth ride, but analysts believe it would take a significant downturn in the economy and corporate earnings for stocks to plunge back into the bear market depths. Analysts anticipate that any emerging signs of an economic slowdown will be offset by expectations for the Fed to ease off its current restrictive policy stance, which would bolster the stock market, even amidst economic weakness.

There's no guarantee that the current mood will shift immediately, but analysts believe this bout of volatility is carving out an attractive buying opportunity in both stocks and bonds. Ultimately, it's the trio of the economy, corporate earnings, and interest rates - not the calendar - that will steer market performance moving forward. But for those who like a bit of trivia, we'll note that October has a knack for establishing market bottoms. Looking back at the last eight bear-market bottoms over the past 50 years, half of them (1974, 1990, 2002, 2022) occurred in October.

Analysts’ Stock Highlights

Here's a quick rundown of some notable stock movements driven by quarterly earnings, analyst ratings, or other news:

📉AES Corp.

(AES) slipped 1.7% after UBS downgraded the utility's stock from "buy" to "neutral," citing pressure from rising interest rates and a declining coal business outlook.

📈e.l.f. Beauty

(ELF) climbed 4% after Jefferies upgraded the cosmetics retailer's stock from "hold" to "buy," applauding its market leadership.

📉Levi Strauss

(LEVI) dropped 0.5% after the apparel maker reported lower-than-expected revenue and reduced its full-year sales forecast.

📈MGM Resorts International

(MGM) climbed 5.4% after the company reassured investors that a cyberattack last month would have minimal impact on its financial outlook beyond the third quarter.

📈Pioneer Natural Resources

(PXD) soared nearly 11% after The Wall Street Journal reported that Exxon Mobil Corp (XOM) was close to a deal to acquire Pioneer for about $60 billion. However, Exxon shares fell 1.2%.

What To Expect in the Markets Next Week

Next week is going to be a busy one as the earnings season kicks off with reports from several big banks and financial-sector companies. We're talking about the likes of JPMorgan Chase (JPM), Wells Fargo (WFC), Citigroup (C), BlackRock (BLK), and PNC Financial Services (PNC). Buckle up, folks!

However, it seems like the overall sentiment among companies about their earnings prospects is rather pessimistic. Out of the 116 S&P 500 companies that have issued earnings guidance, a whopping 74 have put out negative guidance. On the brighter side, 42 companies have issued positive outlooks, according to research from FactSet.

Interestingly, the number of companies issuing guidance this time around is the highest since FactSet began tracking this metric in 2006. We’re looking at a record-breaking 116 companies, surpassing the previous record of 113 last quarter. Quite a significant milestone, don't you think?

Guess what? It's time for some serious shopping! Amazon (AMZN) is rolling out the red carpet for its Prime members with the "Prime Big Deal Days" event starting today. And it's not just for the U.S., this shopping extravaganza is taking place in 19 countries. So, get ready to grab some fantastic deals!

Expect to see some hefty discounts on popular brands like Peloton, LG, Sony, iRobot, SharkNinja, and even Barbie. Yes, you read that right, Barbie! It's time to get that holiday shopping started early, don't you think?

This event, first announced in August, comes hot on the heels of Prime Day 2023, which was Amazon's most successful Prime Day to date. Talk about keeping the momentum going! During the two-day Prime Day event, customers worldwide snapped up a whopping 375 million products, saving a combined $2.5 billion on deals and discounts. Now that's what we call a shopping spree!

The first day of Prime Day this year even set a new record as the single-biggest sales day ever on Amazon. Can the "Prime Big Deal Days" event top that? Only time will tell.

This Wednesday, we're expecting the Bureau of Labor Statistics (BLS) to release the September Producer Price Index (PPI). This index tracks inflation from the perspective of manufacturers and wholesalers. Why does this matter? Well, producer prices often give us a sneak peek into future consumer prices, as the costs borne by manufacturers are eventually passed on to consumers.

But that's not all. On Thursday, we'll be keeping an eye out for the latest Consumer Price Index (CPI). The Federal Reserve Bank of Cleveland is projecting a 0.4% rise in consumer prices for the last month and a 3.7% increase from a year ago. When we exclude the ever-fluctuating food and energy costs, the core prices are also likely to have gone up by 0.4% from August and 4.2% year-over-year. If these forecasts hold true, it would mark the smallest annual increase since September 2021.

Scheduled economic releases for week of October 9, 2023.