Last Friday, a strong jobs report fueled a rally, helping push the stock market into positive territory for the week. The S&P 500, Dow, and Nasdaq all managed to recover from sharp losses experienced earlier in the week due to rising tensions in the Middle East, which led to an uptick in oil prices and increased the CBOE Volatility Index, often referred to as Wall Street’s fear gauge. A silver lining amidst this uncertainty is that the market has alleviated its overbought conditions, shifting the S&P Short Range Oscillator into a more neutral position. Should market conditions turn oversold, investors will be prepared to act.
Despite some small purchases, we reduced our stock exposure during the recent overbought periods, aligning with our disciplined investment strategy. This has led to a cash position of approximately 9.4% in our otherwise all-stock portfolio. The release of September’s employment data on Friday emerged as a pivotal market event, with the US economy adding 254,000 nonfarm jobs, far exceeding the expected 150,000. The unemployment rate fell to 4.1%, slightly better than the anticipated unchanged rate of 4.2%. Hourly earnings also increased by 4% year-over-year, surpassing the estimated 3.8% and marking an acceleration from August’s 3.9% gain. Jim Cramer referred to Friday’s jobs report as the “no landing number,” suggesting that moderating inflation coupled with a strong labor market fulfills the Federal Reserve’s dual mandate, thereby maintaining the status quo and avoiding both soft and hard landings.
The market anticipates interest rate cuts of 25 basis points at the Federal Reserve’s meetings in November and December, following a significant 50-basis-point cut in September. This would translate to a total of 100 basis points, or one percentage point, of cuts by year-end. Lower short-term rates typically lead to cheaper mortgage rates; however, the longer end of the bond yield curve has remained high, as indicated by Friday’s increase in the 10-year Treasury yield following the jobs report. Consequently, rates on a 30-year fixed mortgage jumped to 6.53%, according to Mortgage News Daily. Matthew Graham, chief operating officer at Mortgage News Daily, commented that the strength of this jobs report could be seen as an outlier in a recent trend of weaker data, leaving room for optimism regarding future reports.
In terms of sector performance, the S&P 500 energy sector index experienced the most significant gains, rising over 6.5% due to concerns about escalating oil prices following an Iranian missile attack on Israel and fears about Israel’s potential response. President Joe Biden has since advised Israel against targeting Iran’s oil infrastructure. Other factors that could affect oil prices in the coming weeks include Chinese economic stimulus measures, OPEC+ production cuts, and the conclusion of a recent US port strike.
On the horizon, the upcoming week features the kickoff of third-quarter earnings season for banks, the release of crucial inflation reports, and an important AI event hosted by Advanced Micro Devices (AMD).
Inflation Reports: On Thursday, the September Consumer Price Index (CPI) report will be released, with economists forecasting a 2.2% year-over-year increase at the headline level and a 3.1% rise at the core level, which excludes volatile food and energy prices. Special attention will be given to the CPI’s shelter index, a significant contributor to overall inflation. Following that, the September Producer Price Index (PPI) will be published on Friday. While the Federal Reserve primarily focuses on consumer prices, the PPI remains critical; unexpected increases in wholesale prices could indicate future retail price hikes as companies strive to maintain their profit margins.
Bank Earnings: Wells Fargo is set to report earnings before the market opens on Friday. Last week, Jim Cramer expressed a favorable outlook on Wells Fargo and suggested it should be on investors’ buy lists. Alongside the bank’s quarterly results, analysts will be keen to hear the management’s insights on future business prospects in light of declining interest rates, which could benefit its corporate and investment banking divisions. Updates regarding the bank’s asset cap imposed by the Federal Reserve will also be closely monitored.
AI Developments: On Thursday, AMD will host its “Advancing AI” event. Cramer has urged investors who do not own AMD shares to consider purchasing before CEO Lisa Su’s presentation. He believes AMD has a compelling AI narrative centered on its high-quality chips for data centers and personal computers. Observers will be watching to see if the event spurs a catch-up trade for AMD, given its relative underperformance compared to rivals like Nvidia.
Upcoming Events:
- Tuesday, Oct. 8: PepsiCo (PEP) earnings report.
- Thursday, Oct. 10: Delta Air Lines (DAL) and Domino’s Pizza (DPZ) earnings reports, initial jobless claims, and the CPI release; AMD’s Advancing AI event.
- Friday, Oct. 11: Producer Price Index (PPI) release and earnings from Wells Fargo (WFC), JPMorgan (JPM), and BlackRock (BLK).
CNBC, Mint, and Investopedia contributed to this report.
