This morning, the U.S. Department of Labor reported that nonfarm payrolls for the month of September increased by 263,000, versus economists’ consensus expectation of 275,000 and the prior-month gain of 315,000. Also for last month, the unemployment rate came in at 3.5%, two tenths of a percentage point below both Wall Street’s outlook and the August reading; average hourly earnings rose 0.3%, which marked a steady month-to-month showing; and the labor participation rate stood at 62.3%, compared to 62.4% previously. Investors took a net unfavorable view of the data, with futures indicating a negative opening. Their thinking is that the information implies a continuing tight labor market, which has been an element in the U.S. Federal Reserve’s resolve to continue increasing interest rates.
More economic data will be coming today, specifically, a revision in the government estimate of wholesale inventories, and the figure on total outstanding consumer credit for August. Additionally, there will be more economic commentary from the Federal Reserve Presidents of New York, Minneapolis, and Atlanta. Lately, the stock markets have reacted strongly to any new information that implicates the future direction of interest rates.
The Dow Jones Industrial Average, Standard & Poor’s 500, and the NASDAQ seem poised to post modest single-digit gains for this week.
Share prices received a visible boost early this week when investors learned that the U.K. government was backing away from proposed tax breaks for the wealthiest of that country’s constituents. Economists had voiced particular concern over the U.K. political leaders’ plan to cut taxes, grant fuel subsidies, and issue more sovereign debt. The U.K. central bank showed its opposition earlier, stating that it would buy government bonds in an effort to stabilize interest rates.
Meanwhile, here in the United States, Federal Reserve officials continued to voice their support of Chairman Powell’s aggressive inflation-fighting strategy, via short-term interest rate hikes and reduced bond purchases for the central bank’s balance sheet.
Yesterday, the major domestic stock market indexes displayed some weakness and renewed volatility. Of the 11 Standard & Poor’s identified business sectors, only energy stocks, as a whole, advanced; utilities were visible underperformers. Supporting index values were Exxon Mobil (XOM), Chevron (CVX), Marathon Oil (MRO), and Hess Corp. (HES). Notable drags included American Electric Power (AEP), UnitedHealth Group (UNH), Goldman Sachs (GS), McDonald’s (MCD), and 3M Co. (MMM). The trading volume in the shares of companies that declined was about three times as large as the volume in shares of companies that advanced in price on the day.
Investors have come to terms with the Federal Reserve’s apparent intention of lifting short-term rates, from near zero at the start of this year, to somewhere in the mid-4% range by early 2023. We suspect that the central bank will then take a breather, weighing whether to reverse course as next year progresses. Rates may well stay elevated for much of 2023, depending on trends in inflation. Many economists seem to be of the opinion that a global recession is unavoidable, given the resolve of multiple major countries to lift interest rates to get inflation under control.
In the coming weeks and months, the Fed will receive more readings on Personal Consumption Expenditures, the Consumer Price Index, the Producer Price Index, unemployment, retail sales, consumer sentiment and, among other data points, inflation expectations. At the same time, it will monitor central bank actions overseas, as well as economic happenings in developed and developing market countries. We believe that only a clear indication of a particularly harsh global downturn, a situation that does not appear in the cards, would prompt the Fed to pivot away from its inflation-fighting course sooner than expected.
Stock market volatility will probably remain elevated. For the time being, investors would do well to stay with stocks in financially healthy companies with dependable sales, earnings, and cash flow streams. We published examples of such firms for our subscribers last week (see page 1630 of the Selection & Opinion section of The Value Line Investment Survey® for September 30 for examples). – David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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