The major stock indexes started the month of October and the new quarter with a big rally. The Dow Jones Industrial Average vaulted 765 points higher Monday, or 2.7%, while the S&P 500 gained 92 points (2.6%), and the tech-focused NASDAQ advanced 239 points or 2.3%.
Many of the major market sectors posted strong gains for the day, led by energy (+5.8%), materials (3.4%), and technology (3.2%). Consumer discretionary stocks were the laggards, rising just a quarter of a percentage point. Meanwhile, 10-year Treasury yields fell to 3.65%, after topping 4% last week (the high point in over a decade.
While the “relief rally” was welcomed by investors following recent market declines, there were no economic developments to support the gains. Indeed, the Institute for Supply Management (ISM) reported that its index of U.S. manufacturing activity for the month of September took a step back, falling to its lowest rate of increase since May of 2020. As it stands, the global economy continues to contend with inflation, rising interest rates, Russia’s war with Ukraine, and a strengthening U.S. dollar, among other issues. Added to all this, the Organization of Petroleum Exporting Countries (OPEC) and its allies recently indicated that they are considering production cuts to bolster sagging oil prices.
Meanwhile, third-quarter earnings season is around the corner, but traders will be far more interested in what Corporate America has to say in terms of fourth-quarter guidance. Particularly, they will want to know how consumers are reacting to inflation and higher interest rates.
But the market’s main area of focus remains first and foremost on the Federal Reserve. Until inflation slows to a target rate of around 2%, the lead bank will likely continue to pump the monetary brakes which, generally speaking, is bad news for stocks. The fear, of course, is that higher interest rates will cause a recession. An agency of the United Nations addressed this very concern in the U.N.’s annual report on the prospects for the global economy. Specifically, the United Nations Conference on Trade Development called upon the Fed, along with other central banks, to cut back on the aggressive rate hikes due to their significant impact on global economic output.
Looking to today’s session, U.S. stock futures are suggesting a strong open. In overnight trading, Asian markets were mixed but mostly up. Meanwhile, stocks in Europe are showing sizeable gains. Elsewhere, oil futures are up 2%, to around $85.30 a barrel.
This week’s economic reports include August data on job openings and factory orders due out today, followed tomorrow by the Institute for Supply Management’s September index for services, where a small decline is expected. Friday brings the nonfarm payroll figures and unemployment rate for September, among others. Additionally, several officials from the Federal Reserve have talks scheduled throughout the week.
Given the high level of volatility in the market, investors will want to consider including companies with strong balance sheets, and cash flows ample to provide for their dividends. Subscribers to The Value Line Investment Survey® will find a sample list of such companies in the current Selection & Opinion section of the Survey. – Mario Ferro
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