This morning was light on major economic news, but we did get the latest initial jobless claims figures for the week ending September 30th. At 8:30 A.M. (EDT), the Labor Department report showed that jobless claims totaled 207,000, which was up from the previous-week figure, but still indicative of a tight labor market. The jobless claims data comes ahead of tomorrow’s much anticipated report on September employment and unemployment. The consensus expectation is that the nation created 170,000 jobs last month, which would be down 17,000 from the August total. That report has the potential to have a major impact on how the major averages will finish off this volatile week. In this case, a weak figure may be good for stocks, while stronger-than-expected job creation would raise sentiment that the Federal Reserve may need to hike the federal funds rate again before the end of the year. Wall Street will be paying close attention to the average hourly wage figure, as that may give more clues about inflation in the labor market. Meanwhile, the Commerce Department reported the U.S. trade deficit totaled $58.3 billion in August, narrowing on the weaker imports, which is a positive for the third-quarter gross domestic product (GDP).
In general, the first trading week of October has been a volatile one for stocks and bonds. The major equity averages fell sharply to start the week, with the latest Jobs Openings and Labor Turnover Survey (JOLTS) reading unnerving investors. The JOLTS report showed an uptick in the number of job openings to 9.1 million positions. That brought worries that the increased openings would put upward pressure on wages, as it would be more difficult for companies to attract quality labor. Treasury market yields and the value of the U.S. dollar versus a basket of international curries spiked on the JOLTS data, putting downward pressure on equities. However, the major indexes rallied yesterday on a report from Automatic Data Processing showing a sharp drop in the rate of expansion of private sector jobs. This caused Treasury market yields to pull back and the market to rally. The recovery yesterday, which was led by the technology heavy NASDAQ Composite, may be short-lived as the equity futures are indicating a resumption in the selling that has seen the Dow Jones Industrial Average finish in negative territory for three of the last four sessions. A negative reaction to higher Treasury market yields is again the primary reason.
Several Federal Reserve senior officials have given speeches this week on monetary policy. The prepared remarks have not changed the narrative that the central bank plans to keep interest rates higher for a longer period to effectively fight inflation. Hawkish Cleveland Fed President Loretta Mester, who is not a voting member at the November Federal Open Market Committee (FOMC) meeting, said she would be in favor of another rate hike before the end of the year, but did caution that it remains a fluid situation as the Fed will have to take into consideration how the economy looks next month. The mostly hawkish remarks have put further upward pressure on Treasuries, with yields hitting levels not seen in 16 years.
The spike in Treasury yields are pressuring the banking stocks, as the struggles of the bond market are hurting profits at the banks. The higher borrowing costs also have resulted in reduced loan originations, which can be detrimental to economic expansion. In particular, higher rates for 30-year fixed rate mortgages are hurting home sales and not surprisingly shares of the nation’s major homebuilders have been under pressure recently after hitting all-time highs earlier this year.
We have also seen some profit taking in the oil and gas stocks this week. The primary culprit has been the pull back in crude prices both here and abroad after the price of West Texas Intermediates (WTI) reached $93 a barrel last week. The decision by the Organization of the Petroleum Exporting Countries (OPEC) to keep production at its current pace is pushing prices lower, with WTI contracts changing hands at less than $84 a barrel this morning. In recent months, the jump in oil prices has not helped the Federal Reserve’s cause, as it has put upward pressure on the headline inflation figure. While the Fed typically does not base its monetary policy decisions on the energy market, the higher oil and gas prices could potentially push prices for other commodities and manufactured products higher, which would indirectly drive inflation upward in the near term.
So what is an investor to do given the continued headwinds for stocks and bonds? In a high rate environment, we continue to recommend the stocks of high-quality companies that have demonstrated an ability to generate steady earnings and cash flows even during difficult periods. With valuations for S&P 500 companies still running above historical averages, companies that disappoint on the earnings are likely to feel the wrath of investors, as those valuations are less likely to be justified in the current environment. - William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
CLICK HERE for more information on our services or call 1-800-VALUELINE (1-800-825-8354). Our account managers are available Monday through Friday, 8:00 AM to 6:00 PM Eastern Time.
