This morning, the U.S. Bureau of Labor Statistics released data, setting up the stock market for a positive opening. Additions to nonfarm payrolls for August tallied 315,000, which was below economists’ expectation of 318,000 and lower than the prior month’s robust figure of 526,000. The unemployment rate increased to 3.7% from the previous level of 3.5%, a bit of a surprise. Average hourly earnings continued to rise last month, though at a modestly slower 0.3% rate, versus 0.5% in July. Labor participation ticked higher from 62.1% to 62.4%. A reading on July factory orders is due out shortly. The consensus is that order growth significantly eased from June’s 2.0% pace. Also, market watchers will get a read on revised core capital equipment orders, which have slackened, lately.
Since August 26th, when Federal Reserve Chairman Jerome Powell gave a short speech from Jackson Hole, Wyoming reiterating the central bank’s strategy to aggressively fight inflation, stocks have visibly lost ground. There was some stabilization yesterday, prior to today’s employment report. At the end of the day’s trading, the Dow Jones Industrial Average and the Standard & Poor’s 500 gathered some strength, posting marginal gains. The NASDAQ, however, suffered a fractional loss. Decliners outnumbered advancers by about 2.5 to 1.0. Sectors in the black included health care, consumer staples, consumer discretionary, financials, real estate, utilities, communications services, and industrials. Those in the red were energy, materials, and technology. Moderna (MRNA), Ross Stores (ROST), Walmart (WMT), and Johnson & Johnson (JNJ) provided some support to the market, while NVIDIA (NVDA), Monolithic Power (MPWR), Valero Energy (VLO), and Boeing (BA) were notable drags.
Prior to its upcoming September 20-21 meeting, the Fed will examine fresh inflation data. We would not be surprised to see a further easing of prices, but the costs of materials, components, products, and services for businesses and consumers likely will hold at elevated levels. As a whole, Wall Street seems to have conceded that the Fed will remain forceful, raising short-term interest rates by another three-quarters of a percentage point. Ultimately, the central bank may need to increase rates to more than 3.5% in total, compared to the near zero range of earlier this year, that is, just prior to the commencement of the new liquidity-tightening cycle. Mr. Powell, much to the Street’s chagrin, has stated that a pivot toward rate cuts might not happen in 2023.
Wall Street pundits have turned gloomy in the wake of the Kansas City Fed-hosted Wyoming symposium. Many investors now seem more convinced that we are still in a bear market situation, as evidenced by stock selling on any strength. Reasons for the gloom include emerging evidence of reduced spending on the part of consumers and commercial enterprises, rising consumer debt (e.g., credit card balances), a softening housing sector, declining commodities prices, weaker auto demand, the ongoing conflict between Russia and Ukraine, and a slower growing economy in China. There is concern that the stock market could revisit its mid-June lows. Should consumers and businesses prove financially resilient in the months ahead, however, that would be a plus for stock prices. On balance, there’s considerable uncertainty. Investors would be prudent to stay with high-quality equities in companies with lengthy histories of solid sales, earnings, cash flow, and dividend growth.
– David M. Reimer
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
