WHY EQUITIES MIXED AGAIN THIS WEEK

Weekly Market Update — October 14, 2023

• Wall Street and the world started the week with Israel declaring war on Hamas after a surprise attack launched by Hamas on Saturday and worries that it might develop into a wider global conflict weighed on traders all week
• Equity markets still turned in a mixed week, as smaller-caps underperformed larger-caps, mega-caps outperformed large- and mid-caps and value stocks outpaced growth stocks
• When Friday’s final market bell rang out, the mega-cap DJIA (+0.8%) and large-cap S&P 500 (+0.4%) were positive while the tech-laden NASDAQ (-0.2%) and small-cap Russell 2000 (-1.5%) were not
• In economic news, both the Producer Price Index and Consumer Price Index came in higher than expected and hoped, giving rise to worries of more rate hikes from the Fed
• Of the 11 S&P 500 sectors, 8 advanced with Energy (+4.5%) being way out in front and Consumer Discretionary (-0.7%) bringing up the rear
• Oil jumped 6% this week to $87.80/barrel, mostly driven by geopolitical events
• The 2-year Treasury yield fell one basis point to 5.05% while the 10-year Treasury yield dropped 15 basis points to 4.63%
• The big banks kicked off earnings season and JPMorgan Chase, Wells Fargo, and Citigroup all turned in better than expected results, helped by rising rates

*Source: Bonds represented by the Bloomberg Barclays US Aggregate Bond TR USD. This chart is for illustrative purposes only and does not represent the performance of any specific security. Past performance cannot guarantee future results.

Stocks and Equities Mixed as Earnings Season Gets Underway

The major U.S. equity indices turned in a mixed week, as conflict in Israel garnered most of Wall Street’s collective worries. Without question, the major news of the week was clearly the widening war in the Middle East and not unexpectedly, Defense stocks and Energy stocks jumped while airline stocks declined.

It was also the beginning of earnings season and the big banks (Citigroup, Wells Fargo and JPMorgan Chase) all beat expectations. Accordingly, the large-cap value stocks outperformed the large-cap growth names on the week.

Outside of that conflict, inflation was on everyone’s mind, especially with respect to the release of the minutes from the most recent Federal Reserve meeting. But the Fed’s meeting minutes were measured – neither dovish or hawkish.

The release of the minutes from the Federal Reserve’s September policy meeting didn’t really forecast future rate direction, although the language that read “all agreed that rates should stay restrictive for some time,” and the “Fed should shift communications from how high to raise rates to how long to hold rates” gave hope that maybe the Fed will hold rates at its next meeting.

There was a lot of economic data for Wall Street to digest this week, including that:

• The Producer Price Index for September was up 0.5% month-over-month following a 0.7% increase in August.
• The Producer Price Index, excluding food and energy, rose 0.3% month-over-month following a 0.2% increase in August.
• On a year-over-year basis, PPI was up 2.2%, versus 1.6% in August, and core PPI was up 2.7%, versus 2.2% in August.
• The 2.2% year-over-year increase in the Producer Price Index for final demand was the largest 12-month increase since the 12 months ended in April.

• Initial jobless claims for the week ending October 7 were unchanged at 209,000.
• Continuing jobless claims for the week ending September 30 increased by 30,000 to 1.702 million.
• The four-week moving average for initial claims decreased by 3,000 to 206,250.
• The four-week moving average for continuing claims increased by 4,750 to 1,674,250.
• The total number of continued weeks claimed for benefits in all programs for the week ending September 23 was 1,609,943, a decrease of 2,205 from the previous week. In the same week a year ago, there were 1,255,127 weekly claims filed for benefits in all programs.

• The final reading of the University of Michigan Consumer Sentiment Index for September came in at 68.1. The final reading for August was 69.5. One year ago in September, the reading was at 58.6.
• The Current Economic Conditions Index rose to 71.4 from the preliminary reading of 69.8 but was down from August’s final reading of 75.7.
• The Index of Consumer Expectations fell to 66.0 from the preliminary reading of 66.3 but was up from August’s final reading of 65.5.
• Year-ahead inflation expectations ticked up to 3.2% from the preliminary reading of 3.1% but were down from August’s final reading of 3.5%.
• Five-year inflation expectations were 2.8%, up from the preliminary reading of 2.7% but down from August’s final reading of 3.0%.

Inflation Rises in September

The U.S. Bureau of Labor Statistics reported that the Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4% in September on a seasonally adjusted basis, after increasing 0.6% in August. Over the last 12 months, the all items index increased 3.7% before seasonal adjustment.

“The index for shelter was the largest contributor to the monthly all items increase, accounting for over half of the increase. An increase in the gasoline index was also a major contributor to the all items monthly rise. While the major energy component indexes were mixed in September, the energy index rose 1.5% over the month. The food index increased 0.2% in September, as it did in the previous two months. The index for food at home increased 0.1% over the month while the index for food away from home rose 0.4%.

The index for all items less food and energy rose 0.3% in September, the same increase as in August. Indexes which increased in September include rent, owners’ equivalent rent, lodging away from home, motor vehicle insurance, recreation, personal care, and new vehicles. The indexes for used cars and trucks and for apparel were among those that decreased over the month.

The all items index increased 3.7% for the 12 months ending September, the same increase as the 12 months ending in August. The all items less food and energy index rose 4.1% over the last 12 months. The energy index decreased 0.5% for the 12 months ending September, and the food index increased 3.7% over the last year. ”

Small Businesses Again Not Feeling Optimistic As Inflation is #1 Issue

The National Federation of Independent Business released the following on October 10th:

The NFIB Small Business Optimism Index decreased half of a point in September to 90.8. September’s reading marks the 21st consecutive month below the 49-year average of 98. Twenty-three percent of owners reported that inflation was their single most important problem in operating their business, unchanged from last month and tied with labor quality as the top concern.”

Key findings include:

• Small business owners expecting better business conditions over the next six months deteriorated six points from August to a net negative 43% seasonally adjusted, however, 18 percentage points better than last June’s reading of net negative 61% and definitely at recession levels.
• Forty-three percent (seasonally adjusted) of owners reported job openings that were hard to fill, up three points from August and remaining historically high as owners can’t hire enough workers due to few qualified applicants.
• Seasonally adjusted, a net 23% plan to raise compensation in the next three months, down three points from August.
• The net percent of owners raising average selling prices increased two points to a net 29% seasonally adjusted, still a very inflationary level.
• The net percent of owners who expect real sales to be higher increased one point from August to a net negative 13% (seasonally adjusted), still a very dismal posture.

Open Jobs Still an Issue

As reported in NFIB’s monthly jobs report, “43% (seasonally adjusted) of all small business owners reported job openings they could not fill in the current period, up three points from August. Owners’ plans to fill open positions remain elevated, with a seasonally adjusted net 18% planning to create new jobs in the next three months.

Fifty-seven percent of owners reported capital outlays in the last six months. Of those making expenditures, 41% reported spending on new equipment, 22% acquired vehicles, and 17% improved or expanded facilities. Twelve percent of owners spent money on new fixtures and furniture and 7% acquired new buildings or land for expansion. Twenty-four percent of owners plan capital outlays in the next few months.”

Fed Meeting Minutes Released

Wall Street agonized over the release of minutes from the U.S. Federal Reserve’s last meeting in September. Fed officials mentioned uncertainties around the economy, oil prices and financial markets as supporting “the case for proceeding carefully.

“Recent indicators suggest that economic activity has been expanding at a solid pace. Job gains have slowed in recent months but remain strong, and the unemployment rate has remained low. Inflation remains elevated. The U.S. banking system is sound and resilient. Tighter credit conditions for households and businesses are likely to weigh on economic activity, hiring, and inflation. The extent of these effects remains uncertain. The Committee remains highly attentive to inflation risks.”

Further, the Fed said:

“In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee’s 2 percent objective over time. A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted. All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks.”

Market Predicting No Rate Hike in November

The likelihood that the Fed will change the Federal target rate at its upcoming November FOMC meetings, according to interest rate traders is low, as over 92% believe the Fed will keep rates the same:

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