Weekly Market Update – October 6, 2023

Quick Takes

• Friday’s employment report for September showed 336,000 Non-Farm Payrolls (NFP) were added in the month, nearly twice what Wall Street was expecting. However, wage growth was up only modestly, and labor participation was steady.
• The S&P 500 broke a four-week slide with a +0.5% gain for the week. The tech-heavy Nasdaq Composite was up +1.6% for the week, to its highest level in two weeks. But the small cap Russell 2000 continued to lag, dropping -2.2%. The MSCI EAFE sank -1.9%, and the MSCI Emerging Markets fell -1.6%.
• The 10-year Treasury note yield briefly hit a 16-year high of 4.88% before it settled back to close the week at 4.80%. That was still 23 percentage points higher than the prior week and led the Bloomberg U.S. Aggregate Bond Index down -1.2%, its 5th straight weekly loss.

Stocks mixed, bonds down on surprise jobs report

Stocks ended the week strong after the September jobs report showed hiring was much stronger than expected. Early Friday, the Labor Department reported that the U.S. economy added 336,000 nonfarm payrolls in September, the biggest jump since January and nearly double what analysts were expecting. At first, stocks sank on the headline jobs number, but after digesting the report, which showed only moderate wage inflation and steady labor participation, stocks marched higher throughout the day. The Goldilocks combination of strong hiring but modest wage pressures showed a placid inflationary impact, which encouraged investors. The S&P 500 Index gained +1.2% on Friday, enough for a +0.5% weekly advance, which ended a four-week losing streak. The Nasdaq Composite Index was up +1.6% on Friday and the week, to its highest close in more than two weeks. Small caps, which have trailed much of the year, weren’t able to keep up, and the Russell 2000 Index lost -2.2% for the week. 

Of course, the U.S. labor market situation didn’t do anything for non-U.S. stocks. Developed market international stocks (as measured by the MSCI EAFE Index) fell -1.9%. Economic data signaled that eurozone economies struggled in the third quarter, and rising yields on Japanese government bonds weighed on stocks there. The MSCI Emerging Markets Index was down -1.6%. Financial markets in China were closed last week for the Mid-Autumn Festival and National Day holiday. China’s factory activity returned to expansion for the first time since March, perhaps indicating that the economic slowdown there may have bottomed.

Bond investors were also initially concerned about the Federal Reserve’s response to such a stubbornly strong labor market and sent the 10-year Treasury note yield briefly near a 16-year high of 4.88% before it settled back to close the week at 4.80%. That was still a +23 basis point increase from the prior week, its biggest weekly move since December 2022. The MOVE index, which measures Treasury bond volatility, jumped as high as 140 this week after falling below 100 in mid-September. The Bloomberg U.S. Aggregate Bond Index fell -1.2%, its fifth straight weekly decline, and is down in 9 of the last 11 weeks (bond prices move inversely to bond yields). Non-U.S. bonds (the Bloomberg Global Aggregate ex U.S. Bond Index) also fell -0.9% for the week and are down in 14 of the last 16 weeks. 

Wholesale and consumer inflation reports will be watched closely this week to see whether the Fed will still face pressure to reign in inflation. On Wednesday, the Fed will release the minutes of its mid-September meeting when it left rates unchanged, but members showed the possibility of needing future rate hikes. Third quarter earnings reports also start this week. Companies in the S&P 500 are projected to post a -0.3% year-over-year drop in third-quarter earnings, according to FactSet estimates, which would be the smallest decline in the past four quarters. But the majority of companies historically beat expectations, so it’s possible third quarter profits could actually see their first growth in a year. That would go a long way to halt the recent slide in stocks the last two months.

Chart of the Week

The magnitude and rapid speed of the Federal Reserve’s rate increases has pushed mortgage rates to their highest levels since November 2000, and it is now weighing on the housing market. According to the Mortgage Bankers Association (MBA), the average 30-Year Mortgage Rate rose to 7.53% for the week ending September 29. That’s +0.78 percentage points higher than a year earlier, the fourth consecutive weekly rise, and the 10th gain in the last 11 weeks. The MBA also reported that mortgage applications to purchase a home at the end of September fell to the lowest level of activity since 1996. Weekly MBA Mortgage Applications sank -6.0% for the week ended September 29, following the prior week’s -1.3% dip. The Purchase Index component was down -5.7% following a -1.5% decline the prior week, and the Refinance Index component dropped -6.6% following a -0.9% slide the prior week.

23-Year High in Mortgage Rates Sinks Applications

MBA mortgage purchase index, weekly

Note: Seasonally adjusted; March 16, 1990=100
Source: Mortgage Bankers Association (MBA), The Wall Street Journal.

Economic Review

• The September Employment Situation showed much stronger hiring than expected. On Friday, the Labor Department reported that U.S. employers added a seasonally adjusted 336,000 Non-Farm Payrolls (NFP) during the month, up from a positively revised 227,000 in August (originally 187,000) and almost double Wall Street expectations for 170,000. July was also revised higher, to 236,000 from 157,000. It was the first time this year that the Labor Department revised jobs higher and followed six consecutive months of downward revisions–the longest streak of negative revisions since the global financial crisis. Bars, restaurants, and hotels led the way again in hiring, adding nearly 100,000 jobs in the month. Americans have been traveling and going out more since the end of the pandemic and spending a lot of money on services. Health-care providers also boosted employment by 41,000. Average Hourly Earnings were up +0.2%, unchanged from the prior month and shy of expectations of +0.3%. Year-over-year, Average Hourly Earnings were up +4.2%, just below expectations and the prior month, which were both +4.3%. In another sign of a softening labor market, Average Weekly Hours people worked held steady at 34.4, matching expectations. Businesses tend to cut hours before resorting to layoffs when the economy slows. As expected, Labor-Force Participation was unchanged at 62.8%, which is still below the February 2020 prepandemic level of 63.3% but at the highest level since the pandemic. The surprise increase in hiring complicates the Federal Reserve’s decision on whether to pause raising interest rates or hike again to combat wage increases, which add to inflation pressures.
• The Institute for Supply Management’s (ISM) Manufacturing PMI made another incremental improvement in September, moving up to 49.0% from 47.6% and beating expectations of 47.9%. That’s the highest level since November, although it remains in contraction territory for the eleventh straight month (levels below 50 indicate contracting economic activity), which is the longest monthly contraction streak since the 2007-2009 Great Recession. Like the overall index, New Orders remained in contraction for more than a year now but did improve to 49.2% from 46.8% the prior month. On the upside, the Production and Employment indexes both rose again and are in expansion territory now. The Prices Paid index, a measure of inflation, sank -4.6 points to 43.8. Overall, 7 of 10 component indexes advanced in the month, but only two are in expansion. In terms of industries, 5 of the 13 reported growth for the month.
• Economic activity in the U.S. services sector slipped in September, with the Institute for Supply Management (ISM) Services Purchasing Managers Index (PMI) dipping to 53.6% from 54.5% the prior month, but still beat expectations for 53.5, and marking the 9th straight reading above the 50% threshold that indicates expansion in the economy. Under the surface, the report was just as strong, with 13 of the 18 industries reporting growth. The Business Activity/Production index edged up again to 58.8% from 57.3%, but the New Orders index sank -5.7 percentage points to a nine-month low of 51.8%. The Employment index also slipped -1.3 percentage points to 53.4%. The Prices index was unchanged at 58.9%–another sign that inflation remains stubbornly elevated.  
• The seasonally adjusted S&P Global U.S. Manufacturing PMI improved to 49.8 from 47.9 the prior month, beating expectations for 48.9 and falling just short of the 50.0 threshold, indicating economic growth. New Order fell for the fifth month running in September, albeit at the slowest pace in this period. Inflationary pressures intensified but remain historically muted. Expectations for future output also rose, hitting the highest since April 2022 amid hopes of a pick up in demand conditions.
• Like the ISM services report, the S&P Global U.S. Services PMI reported stagnation of service sector business activity along with stubborn price pressures. Their survey of private sector services activity slipped to 50.1 in September from 50.5 the prior month, just barely above the key 50.0 level. It was the weakest expansion since January. The services PMI has now declined for four successive months after starting the year with five consecutive increases. New Orders dropped for a second straight month and at the fastest rate seen in 2023. Input Prices rose at a marked pace that was similar to that seen in August, but efforts to pass on higher costs to customers led to a faster uptick in Output Prices. Companies highlighted that elevated inflation, high interest rates, and economic uncertainty all stymied customer demand.
• The August Job Openings Labor Turnover Survey (JOLTS) rebounded with a rise to 9.61 million from 8.92 million the prior month (revised up from 8.83 million), which was the lowest level since March 2021. That was far above expectations for 8.82 million but still well off the peak of 12 million last year. Job openings are an indication of the health of the labor market and the broader U.S. economy. Openings fell the most in white-collar jobs and professional roles. Job listings surged for white-collar professionals and also increased for finance and insurance, public education, and manufacturing. The number of job openings for each unemployed worker was unchanged at 1.5, remaining well above prepandemic levels of 1.2 but down from a peak of 2.0 in 2022. The Fed is watching the ratio closely and wants to see it fall back to prepandemic norms. The Hiring Rate remained at 3.7% and has been little changed in recent months. The Quits Rate was flat at 2.3%, off from the peak of 3.0% in April 2022.
• The Commerce Department reported Construction Spending rose +0.5% in August to a seasonally adjusted annual rate of $1.98 trillion, in line with expectations of +0.5% and July’s upwardly revised +0.9%, up from the initial release of +0.7%. Year-over-year (YoY), total construction spending was up +7.4%, compared to +5.6% for the year ended July. Total Private Construction was up +0.5% month-over-month, while total Public Construction was up +0.6% month-over-month. Total Residential Spending increased +0.4% month-over-month while total Nonresidential Spending rose +0.6% month-over-month. Single-Family construction rose +1.7%, while Multi-Family construction was up +0.6%.
• U.S. Consumer Credit plunged -$15.6 billion in August, a material drop from the $11.0 billion gain in July (itself a big fall from the prior month’s $13.8 billion increase) and far under expectations for a $11.7 billion increase. It was the biggest monthly drop since May 2020 and likely a result of people restarting to pay back student loans. Growth for revolving credit, such as credit cards, was up +13.9% to $1.285 trillion. Nonrevolving credit, which tends to be much less volatile than revolving credit and includes auto as well as school loans, plunged by -$30.3 billion, indicating student loan borrowers have started to make payments early to avoid extra interest when the payments resume in October. Student loan payments and interest to the government had been suspended since the pandemic, but interest began accumulating again in September after the Biden administration’s plan to offer debt relief was struck down by the Supreme Court in June. The data from the Federal Reserve is not adjusted for inflation and does not include mortgage loans, which is the largest category of household debt. Overall, it appears that Americans are relying more on debt to pay for their purchases. Credit card debt recently topped the $1 trillion mark for the first time ever, and delinquencies are rising.  
• August Factory Orders rose +1.2% month-over-month, more than the +0.3% gain expected and up sharply from the prior month’s unrevised -2.1% drop. This was the first decline after four straight monthly gains. Ex-transportation, orders were up +1.4%, an improvement on the prior month’s +0.7% increase. Durable Goods Orders rose +0.1%, slightly weaker than the expected +0.2%, driven by increased military spending. The important Core Capital Goods Orders (nondefense capital goods excluding aircraft), a proxy for business spending, rose +0.7% following a -0.4% fall the prior month (revised down from +0.1%).
• U.S. trade with the rest of the world shrank -9.9% in August, resulting in a Trade Deficit of -$58.3 billion, an improvement from the -$64.7 billion deficit the prior month (revised up from -$65.0 billion), a nearly three-year low and better than economists’ consensus expectations of -$59.8 billion. Imports fell -0.7% to $314.3 billion from $316.6 billion the prior month. Exports rose +1.6% to $256.0 billion from $251.9 billion the prior month. Lower trade deficits add to Gross Domestic Product (GDP), so the decline in the deficit could give a slight boost to GDP in the third quarter.
• Weekly Initial Jobless Claims rose +2,000 to 207,000 for the week ended September 30, below expectations for 210,000 and last week’s 205,000 (revised up from 204,000). The number of people already collecting unemployment claims (i.e., Continuing Claims) fell -1,000 to 1,664,000 in the week ended September 23, below consensus for 1,671,000 and down from last week’s reading of 1,665,000 (revised down from 1,670,000).

The Week Ahead

The calendar isn’t terribly full in the coming week, but it will have several potential market-moving reports. Chief among those will be the September inflation data, with wholesale inflation on Wednesday with the Producer Price Index (PPI) and then consumer inflation on Thursday with the Consumer Price Index (CPI). On Wednesday, the Federal Reserve will release the minutes from the central bank’s mid-September policy meeting. Other economic data out next week includes Tuesday’s NFIB Small Business Optimism Index for September as well as Friday’s release of Consumer Sentiment Index for October by the University of Michigan. The start of the third quarter earnings season will also command attention by investors. Companies publishing results next week include PepsiCo on Tuesday and Delta Air Lines, Domino’s Pizza, and Walgreens Boots Alliance on Thursday. On Friday, several of the big banks (Citigroup, JPMorgan Chase, and Wells Fargo) will all report before the market opens. The stock market will be open on Monday, but U.S. bond markets will be closed in honor of Columbus Day.

Did You Know?

BAILOUT INFLATION – On October 3, 2008, amid the depths of the financial crisis, President George W. Bush signed into law an unprecedented $700 billion plan to rescue the U.S. financial system. The move established the Troubled Asset Relief Program, known as TARP, a rescue package that saved a swath of U.S. companies but never won widespread public support. By comparison, the CARES Act, the initial response to the COVID-19 pandemic, topped $2 trillion (Source: The Wall Street Journal).

HOLIDAY DELIVERY – Carriers will deliver an estimated 82 million packages a day during the peak holiday season that starts around Thanksgiving and ends in mid-January. Last year, the average was 90 million, according to ShipMatrix, which analyzes industry data. As consumers limit their shopping or instead spend on travel and services, some parcel carriers are offering discounts or forgoing holiday surcharges (Source: ShipMatrix, The Wall Street Journal).

BIRKEN-SHOCK – Birkenstock is seeking a $9.2 billion valuation for its initial public offering (IPO). The shoemaker plans to sell nearly 10.8 million shares at between $44 and $49 per share. At the $46.50 midpoint, the company, which is owned by private-equity firm L Catterton, would receive net proceeds of about $450.2 million (Source: The Wall Street Journal).

This Week in History

SPACE RACE – On October 4, 1957, the USSR launched the Sputnik, the world’s first orbiting satellite, setting off panic that the U.S. was falling behind in the space race. In the next 12 trading days, the Dow Jones Industrial Average lost -9.1% of its value (Source: The Wall Street Journal).

Asset Class Performance

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different than the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “Allocation” is a weighted average of the ETF proxies shown as represented by 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.