Market Note – October 11, 2022

By Hightower Great Lakes on October 11, 2022

Jobs Rise and Unemployment Falls

The markets rallied early last week, following some oversold market conditions and depressed sentiment.

Contrarian buy-signals in the early week were fueled by the S&P 500’s worst September since 2002, and a number of sentiment and positioning indicators with extreme (bearish) readings.

The Australian central bank surprised with a smaller-than-expected rate hike. The price component within the U.S.

ISM Surveys remained sharply lower in September, following a similar sharp decrease in July and August. Job openings saw a near-record decline, and initial jobless claims increased more than expected.

Investors hoped that this data would contribute toward a Fed pivot, but Fed officials, like Neel Kashkari, continued to emphasize “the bar to actually shifting our stance on policy is very high.”

Nonfarm payroll figures indicated healthy hiring conditions, a continued tight labor market, and rising wages. The U.S. economy added 263,000 nonfarm jobs in September, and unemployment fell back to 3.5% after rising to 3.7% in August.

Hourly earnings were up +5.0% y/y and +0.3% m/m. Despite a drop in job openings and swath of corporate hiring freezes, the labor market remains tight.

Capital markets are reflecting the tight labor market in expectations for the Fed to remain steadfast in their restrictive approach to monetary policy.

Expectations for another 75 bps rate hike in November are 94%, according to Bloomberg.

Chart 1: New Hiring and Unemployment Have Both Trended Downward¹

Fixed Income Movement

Multiple FOMC members spoke publicly last week, expressing hawkish sentiment. The Consumer Price Index (CPI) numbers released this Wednesday will offer more data for members to digest before the Nov 1-2 meeting.

Treasury yields sank through Tuesday, then rose throughout the latter half of the week, accelerating into Friday’s stronger than expected jobs print.

The 2- and 10-year yields moved 6 bps and 4 bps higher, respectively, last week. Credit spreads tightened on the week, with High Yield paring back all the prior week’s widening (IG -8, HY -33).

Municipal yields moved opposite Treasury yields, falling 7-8 bps on the short end and 9-11 bps on the long end.

Markets are “Pricing In” Rates and Risk – Investing in Optimized Risk/Reward

Markets are forward-looking mechanisms, and the S&P 500 is down -23% year-to-date, reflecting a slowing economy and lower corporate earnings expectations.

As the Fed continues to hike rates at a record-pace, it will take 6-9 months for those rate hikes to make their way through the economy – a sustained period of higher costs and slowing demand.

Geopolitical uncertainty also remains a focus as the Russia/Ukraine war escalates and the U.S. implements export controls targeting Chinese semiconductor manufacturers.

Energy has remained largely uncorrelated to market conditions. Despite traditionally being highly cyclical – and the stocks were impacted by the onslaught of recession fears in Q3 – the tight supply and limited capacity environment has an overarching impact on the industry’s profitability and demand.

OPEC lowered their production targets, the U.S. is nearing the end of their SPR releases and significant, multi-year investment is required to provide energy security and stability for key regions worldwide. Moreover, the industry is cheap – trading around 8x CY22 earnings.

In contrast, the technology sector continues to trade at a premium, 21x CY22 earnings, even as companies slash guidance and cite weakening demand.

The large moves in technology names reflect the continued strong ownership – representing more than 25% of the S&P 500.

Financials Reporting Later this Week

We’re expecting conservative guidance from financials later this week, as they kick-off Q3 earnings season. We’re focused on household savings and consumer health indications from checking accounts and credit card spending data.

We’ll be paying attention to information on delinquency rates and non-performing loans, plus net-interest income.

The Week Ahead

Earnings – Wednesday: PEP. Thursday: BLK, DAL, WBA. Friday: C, JPM, MS, PNC, UNH, WFC, USB.

Economics – Wednesday: PPI (September), FOMC (September) Minutes. Thursday: CPI (September). Friday: Retail Sales (September), Michigan Consumer Sentiment (October).

Return for Selected Indices²

Click here to read last week’s Market Note (10/3).

SOURCES

¹ Source: FactSet (chart)

² Source: Bloomberg

Disclosures

OCIO is a group of investment professionals registered with Hightower Securities, LLC, member FINRA and SIPC, and with Hightower Advisors, LLC, a registered investment advisor with the SEC. Securities are offered through Hightower Securities, LLC; advisory services are offered through Hightower Advisors, 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 not indicative of current or future performance and is not a guarantee. The investment opportunities referenced herein may not be suitable for all investors.

All data and information reference herein are from sources believed to be reliable. Any opinions, news, research, analyses, prices, or other information contained in this research is provided as general market commentary, it does not constitute investment advice. OCIO and Hightower shall not in any way be liable for claims, and make no expressed or implied representations or warranties as to the accuracy or completeness of the data and other information, or for statements or errors contained in or omissions from the obtained data and information referenced herein. The data and information are provided as of the date referenced. Such data and information are subject to change without notice.

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