The first day of September, a month that has historically been difficult for stocks, will begin with the major U.S. equity indexes in the midst of a losing streak prompted by last week’s hawkish commentary on monetary policy from Federal Reserve Chairman Jerome Powell at the bank’s Jackson Hole, Wyoming meeting. The Fed leader suggested that the central bank will remain aggressive in its battle to combat inflation. That raised the odds of another three-quarter-point hike to the benchmark short-term interest rate at the late-September Federal Open Market Committee (FOMC) session and the Chairman’s remarks ignited the recent spate of selling on Wall Street. The ensuing late-August selloff erased all of the earlier-month gains and then some.
At 8:30 A.M. (EDT), the Labor Department reported initial jobless claims for the week ending August 27th. The release showed that jobless claims totaled 232,000, which was down 5,000 from the prior week’s tally and the lowest figure since the final week of June. This comes on the heels of yesterday’s report from Automatic Data Processing (ADP) that showed private-sector payrolls increased by 132,000 in August, which was less than half of the previous month’s figure (268,000) and well shy of the consensus forecast of 300,000. This could be a sign that the Fed’s plan to slow jobs growth and wage increases is starting to work, but it was clearly overshadowed by Tuesday’s release showing job openings continued to far outpace the number of people looking for work. The market took the latter data as a sign that the Fed will need to continue raising rates and it led to some more selling stateside, which the equity futures are suggesting will continue at the start of today’s session.
Meantime, the nation’s productivity was in focus this morning. The Labor Department’s report showed that productivity improved slightly quarter-to-quarter, but still declined overall. It fell 4.1% last month, versus the 4.6% decline recorded during the previous 31-day stretch. Unit labor costs overall jumped 10.2%, which was slightly better than the previous month, but still an indicator that wage inflation is prevalent.
The technology sector is in the headlines this morning after chip-making giant NVIDIA (NVDA) disclosed in a Securities and Exchange Commission filing yesterday that the U.S. government is restricting sales to China, "effective immediately." Specifically, the U.S. government has imposed a new license requirement for any future export to China (including Hong Kong) and Russia in order to address the risk that the covered products may be used in, or diverted to, a military end use. The news is weighing on the stock of NVIDIA and shares of fellow chip makers this morning.
The investment community also is keeping close tabs on the energy sector. The price of oil fell sharply yesterday and was down more than 9% during the month of August. Most of the downward pressure is being driven by fears of a recession down the road that will lead to decreased business activity and lower oil consumption. That sentiment, along with the possibility of more oil eventually coming on line from Iran and the views of some market watchers that the European nations may not hold true to the energy sanctions against Russia when the winter heating season is at full throttle later this year, is weighing on oil prices. Conversely, natural gas prices continue to rise on shortage concerns on the Continent. For those investors willing to withstand some volatility, the pullback in oil stocks on the aforementioned factors may start to present a more attractive entry point into the oil patch.
The recent state of the U.S. housing market also is raising fears about a recession. Across the board, the housing and homebuilding data have been ugly. Year to date, pending home sales are down 17% versus the same period in 2021, and homebuyer demand is down 12% year over year. This, along with a 6% drop in the average home selling price in July from the June record is causing some hesitation among the nation’s homebuilders to increase construction. The residential construction sector is the second-largest contributor to the nation’s gross domestic product after the consumer sector. Not surprisingly, the housing stocks have fared terribly thus far this year and, given the current worsening backdrop, still don’t offer much near-term upside appeal.
With continuing worries about inflation, a more aggressive Federal Reserve on the monetary policy front, and concerns that a too-restrictive central bank will push the economy into a recession, investors are finding few places right now to turn to outside of the historically more-defensive areas. An investment strategy focused exclusively on value or growth stocks does not seem prudent, as both areas face a number of potential headwinds in the near term. Investors should note that the yield on the two-year Treasury note hit its highest level this morning since 2007, further inverting the yield curve. This has historically been a sign that the economy is headed toward a recession.
Despite the calendar turn to September, with its difficult history, long-term investors should continue to hold a substantial position in equities. The environment remains volatile, so the safer positions will be in stocks of high-quality companies that have the financial wherewithal to weather an economic downturn, while showing an ability to maintain their dividend payout. Keeping a healthy level of cash in one’s portfolio provides the opportunity to react quickly if one sector begins to look oversold and a better entry point has emerged.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
