The penultimate trading day of September, a month that has been a very difficult one for those owning equities and bonds, begins off a notable rally yesterday and with investors digesting a few economic reports. At 8:30 A.M. (EDT), the Labor Department reported that initial unemployment claims for the week ending September 24th totaled 193,000, which was down sharply from the previous week and yet another sign that the labor market remains tight. Meanwhile, the Commerce Department reported its final revision to the second-quarter gross domestic product (GDP) estimate and it remains unchanged at an annualized decline of 0.6%. Of note, the personal consumption expenditures (PCE) index—the Fed's go-to measure for inflation—was up 9.0% year-over-year during the three-month period. In a nutshell, these figures are probably not what the Federal Reserve wanted to see in its effort to fight inflation. The futures, which were lower heading into the economic news, took another leg down and are presaging a weak opening to the trading day stateside.
Overall, we think investors will continue to watch what Federal Reserve leaders have to say about monetary policy ahead of another round of inflation data in the coming weeks. The new inflation data cycle kicks off tomorrow with the report from the Labor Department on August personal income and spending. Investors will be paying close attention to the latest Personal Consumption Expenditures (PCE) price index reading, as that is considered the most closely watched gauge of inflation by the Federal Reserve.
This week has been another volatile stretch for equity investors who are worried about a number of issues, including stubbornly high inflation, an overly aggressive central bank on the monetary policy tightening front, and a weakening U.S. economy. Add to these financial and economic concerns, the war in Ukraine, an apparent sabotage attack on the key pipelines to Europe, slowing global growth, and rising bond yields both here and abroad, and it would come as no surprise if the volatile trading environment continues in October, a month that has historically produced some of the most turbulent stretches of trading on Wall Street.
In general, the equity market continues to take its cue from the fixed income market. Yesterday’s news that the Bank of England was buying bonds to support its financial system and hopefully drive yields down gave a boost to the international equities markets, including in the U.S. where each of the major equity indexes finished more than 2% to the upside. The rally was even bigger in the small-cap sector. Investors saw the Bank of England’s monetary policy decision as a sign that central banks will step in to help their financial systems when signs of distress emerge. The yield on the 10-year Treasury note, which rose above 4.00% earlier this week, fell nearly a quarter-point on the news. That said, it should be noted that the spread between London’s 10-year “Gilt” note (direct obligations of the U.K. government) and Germany’s 10-year Bund note (direct government notes denominated in euros)—roughly 180 basis points—was the widest in 32 years and could be a sign of some stress in the United Kingdom’s debt markets. This bears watching, given the continued pressure mounting from rising global fixed-income yields.
Turning back to the Federal Reserve, which has been a hot-button topic for investors this year, commentary from several central bank leaders yesterday, including Chairman Jerome Powell, did not change the narrative among traders that the Federal Reserve plans to remain very aggressive on the monetary policy tightening front in an effort to reduce the money supply and slow demand to hopefully bring about some price stability. Given this monetary policy backdrop and rising fears about a recession, investors have few attractive places other than the defensive-oriented sectors to invest these days; notwithstanding yesterday’s rally, which may ultimately turn out to nothing more than a one-off bear market rally. The higher interest rates and bond yields have hurt the higher-growth stocks and fixed-income securities, while the concerns about a recession are pressuring the economically-sensitive cyclical groups.
So what are investors to do in this environment? Given the volatility, most investors will want to consider including in their portfolios 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 on page 1630 of the current Selection & Opinion section of the Survey.
Investors should also be aware of the multinational companies that do a lot of their businesses overseas. The jump in the value of the U.S. dollar, which earlier this week hit a 20-year high versus a basket of international currencies, will reduce the value of overseas profits when translated back into greenbacks. On point, Apple (AAPL) warned this week that economic weakness in China and the strength of the U.S. dollar will weigh on the company’s September-quarter results. Reports also noted that the technology behemoth told suppliers to stop extra iPhone production. Not surprisingly, shares of the company are under selling pressure this week, including in pre-market action this morning.
– William G. Ferguson
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
