The month of September, a historically difficult one for equities, is off to a bearish start. Most of the 11 major sectors, save for the energy group (more below), have been under selling pressure. The increased volatility in the stock market has been a reaction to the unevenness in the Treasury market. In a nutshell, stocks have fallen when Treasury yields rise, and vice versa. This trend played out yesterday, with the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index falling 0.6%, 1.1%, and 0.7%, respectively.
This morning, a rather quiet holiday-abbreviated trading week from a business-beat perspective picked up with a few important releases on the U.S. economy. At 8:30 A.M. (EDT), we received two reports from the Labor Department that were expected to be watched by the Federal Reserve ahead of its two-day monetary policy meeting commencing on September 19th. Unemployment claims for the week ending September 2nd totaled 216,000, which was below the consensus expectation of 230,000, and the lowest number since the last week in January. Meanwhile, productivity in the second quarter (final estimate) was revised to 3.5%, from 3.7%, while unit costs moved higher, to 2.5%. Both reports were not exactly what the Fed would like to see, as it attempts to reduce inflation. Falling productivity leads to higher unit labor costs, which are passed through to higher prices, and prevents the economy from expanding at a decent pace without generating inflation.
Following the economic releases, Treasury yields and the price of the U.S. dollar versus a basket of international currencies moved higher, while the equity futures fell and are indicating continued selling, particularly in the NASDAQ Composite, as trading kicks off stateside. Investors are nervous that the higher lending rates are going to hurt the economy later this year, especially during the all-important holiday shopping season. A number of prominent senior Federal Reserve officials are expected to speak today ahead of the next Federal Open Market Committee (FOMC) meeting and the forthcoming quiet period for the central bank.
Yesterday afternoon, the Federal Reserve’s latest Beige Book summation of economic conditions showed that the economy is now expanding at a modest pace. Of note, spending on tourism remained healthy, but other retail sectors slowed. In addition, the inventory of single-family homes remained constrained and that is keeping property values firm despite potential buyers dealing with higher financing rates. Finally, consumer loan balances rose, as savings built up during the COVID-19 pandemic continue to shrink. Overall, it was not an overly impressive assessment of the U.S. economy and did not quell emerging sentiment on Wall Street that a recession may take place in 2024. It is worth noting that the spread between the two- and 10-year Treasury note yields widened a bit, further steepening the yield curve, which often can be an indication of a forthcoming economic slowdown.
The inflation situation continues to be highly scrutinized by both the Federal Reserve and Wall Street. The central bank can’t be happy with the recent spike in the price of crude oil both stateside and overseas. The price of Brent crude topped the $90-a-barrel market this morning. The higher energy costs will make it more difficult for the Federal Reserve to continue to push the headline inflation figures lower in the coming months. The higher crude quotations are having a detrimental impact on the stocks of industrial companies, as elevated prices will make it more expensive for industrial companies to run their business. The resultant highest seasonal gasoline prices since 2012 may also have a negative impact on travel activities down the road, but there were no signs this summer that spending on such endeavors was slowing down.
It has also been a volatile trading stretch for shares of some of the airlines and automobile makers. The aforementioned higher energy costs will make it more expensive for airlines to fuel their planes, while the threat of a strike from the United Auto Workers (UAW) union is hurting the stocks of some of the automakers.
There has be a shift in recent days to the more defensive sectors amid some of the emerging skittishness among investors. At the forefront yesterday was a movement into some of the healthcare names that were laggards for much of this year when the higher-growth equity groups rallied. In that vein, we continue to recommend that investors look at the stocks of high-quality companies that have a history of generating steady earnings and cash flows even during difficult economic times. With the market valuations looking frothy, those companies that are trading at reasonable price-to-earnings multiples should be given extra attention. – William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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