Market Note – October 10, 2023

By Hightower Great Lakes on October 10, 2023

Labor Momentum

Last week, September JOLTs (job openings) and weekly initial claims both reported better than expected. There are currently 1.5 jobs open for every unemployed person – meaning that the labor market remains tight. The job openings data continued to show strength, rebounding across many sectors, including manufacturing, business services, finance, and health and education services.

The initial unemployment claims four-week moving average remains at very low levels, well below recessionary levels. Finally, the Challenger Gray Jobs Report indicated companies expect to continue hiring – last month increased by 55% from last year’s level.

Chart 1: Nonfarm Payrolls and Initial Claims Data Remains Elevated, Better Than Expected[1]

As we have been highlighting for over a year, a strong labor market and higher wages are very good for the consumer (75% of GDP), confidence and the overall economy. At the same time, the nonfarm payroll report showed average hourly earnings (AHE) at above average levels, yet not accelerating, which indicates progress toward curbing overall inflation.

Beyond the labor market, ISM’s manufacturing and services PMI data continued to show momentum in the economy, driven by new orders, strong employment, higher prices, better inventories and overall business activity.

Chart 2: Resilient Economic Indicators[2]

Putting Cash to Work

Valuations and sentiment have both pulled back, and overall market sentiment has weakened as of late. Not surprisingly, this coincides with the historically most volatile time of the year in markets: August/September and the first part of October. We see opportunities in a variety of sectors and the overall equity and fixed income markets as we approach the strongest period of the year: October to December.

We continue to like energy, discretionary, industrial and technology sectors. We also see select opportunities in healthcare. Now is not the time to be negative with these oversold conditions – it is important to think long-term. We continue to add to high-quality, blue chip companies with strong free cash flow, cheap valuations and dividend growth opportunities.

Chart 3: Valuation Adjustments Create a Buying Opportunity in Equities[3]

Bonds: Prices Lower, Yields Higher

A combination of U.S. quantitative tightening (QT) policy for the foreseeable future and China’s influence has caused higher yields and lower bond prices. Sentiment is quite negative overall for fixed income, which poses an opportunity for long-term investors.

It’s been a very long time (over a decade) since there has been competition to equities. With the 4-year municipal bond at 4% (6% tax equivalent) and a 4-year corporate bond at 6.1%, we see opportunities for higher yielding instruments. 

Chart 4: Yield Curve Continues to Move Higher[4]

Israel at War

Hamas’ terror attack on Israel will have broad implications for middle east relations. The surprise attack towards Israel, coordinated by Hamas and supported by Iran, went undetected by Israeli and international intelligence. It is the most significant breach of Israel’s borders since 1973 and has resulted in hundreds of Israeli civilians killed and taken hostage.[5] This attack comes just weeks after the U.S. unfroze $6 billion in assets for Iran.

U.S. officials flew to Saudi Arabia to speed up ongoing negotiations between Israel, Saudi Arabia and the United States. The talks are centered on Saudi Arabia normalizing its relations with Israel in return for U.S. weapon sales.

Saudi Arabia has not recognized Israel since its founding in 1948; a deal could revamp the geopolitics in the Middle East, largely at the expense of Iran and other Middle Eastern nations with Iranian-backed militias. It is worth noting that Saudi Arabia and Iran restored ties back in March, with negotiations brokered by China. Saudi Arabia is playing the “peacekeeper” role, while building its influence beyond the Middle East.

Saudi Arabia has indicated a willingness to increase its output of oil if prices move too high. Its oil production decisions are still based on economic motivations. Saudi Arabia’s ability to raise output is complicated by its relations with Moscow; both of which have moved in lockstep to keep prices high and restrict production.

OPEC+ forecasters predict a global deficit of 3.3 million barrels a day in the fourth quarter, and many expect Brent Crude Oil prices to top $100.

While a tragic event with an ultimately unknown outcome, from an investment point of view, we believe this will create a flight to safety in risk assets and is the main reason the U.S. equity markets rallied today. The bond market was closed. 

Chart 5: Oil Price Risk Is to the Upside[6]

The Week Ahead

Earnings – Tuesday: PEP; Thursday: DPZ, WBA, DAL; Friday: BLK, JPM, UNH, WFC, C, PNC.

Economics – Wednesday: PPI (September), FOMC Minutes; Thursday: CPI (September)

Return for Selected Indices^[7]

Click here to read last week’s Market Note (10/2).

Disclosures

Investment Solutions is a group comprised of investment professionals registered with Hightower Advisors, LLC, an SEC registered investment adviser. Some investment professionals may also be registered with Hightower Securities, LLC, member FINRA and SIPC. Advisory services are offered through Hightower Advisors, LLC. Securities are offered through Hightower Securities, LLC.

This is not an offer to buy or sell securities. No investment process is free of risk, and there is no guarantee that the investment process or the investment opportunities referenced herein will be profitable. Past performance is neither indicative nor a guarantee of future results. The investment opportunities referenced herein may not be suitable for all investors.

All data or other information referenced herein is from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other data or information contained in this presentation is provided as general market commentary and does not constitute investment advice. Investment Solutions and Hightower Advisors, LLC or any of its affiliates make no representations or warranties express or implied as to the accuracy or completeness of the information or for statements or errors or omissions, or results obtained from the use of this information. Investment Solutions and Hightower Advisors, LLC assume no liability for any action made or taken in reliance on or relating in any way to this information. The information is provided as of the date referenced in the document. Such data and other information are subject to change without notice.

This document was created for informational purposes only; the opinions expressed herein are solely those of the author(s) and do not represent those of Hightower Advisors, LLC, or any of its affiliates.

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[1] Source: FactSet (chart). As of October 9, 2023.

[2] Source: FactSet (chart). As of October 9, 2023.

[3] Source: FactSet (chart). As of October 9, 2023.

[4] Source: FactSet (chart). As of October 9, 2023.

[5] Source: Forbes. As of October 9, 2023.

[6] Source: FactSet (chart). As of October 9, 2023.

[7] Source: Bloomberg. As of October 9, 2023.