Market Note – October 2, 2023

By Hightower Great Lakes on October 2, 2023

Tuning Out the Noise

As advertised, September lived up to its historical month as the most volatile of the year. Uncertainties led to equity and fixed income underperformance with concerns over the Fed, labor strikes, the 36% increase in oil prices and the stronger dollar. In fact, the energy sector was the only uncorrelated equity exposure that outperformed in the month, although it remains a small representation of the S&P 500 at just 4.7% of the index.

Despite the September headwinds, the economy continued to show solid results; August building permits advanced to their highest levels since October 2022; initial unemployment claims continued to fall, at their lowest since February, and the four-week moving average was well below recessionary periods; and core PCE inflation showed continued improvement at just 0.1% in August.

The annualized rate for core PCE in the last three months is +2.2%, in line with the Fed’s target, a very encouraging sign that inflation is making progress.

Chart 1: Building Permits Rising and Initial Unemployment Claims Falling[1]

Chart 2: Pace of Inflation Slowing and New Orders Remain Elevated[2]

Within the economic strength, we’ve discussed the strength in the consumer at length (driven by the strong job market and higher wages) but believe the manufacturing sector in the economy is underappreciated. While this sector only represents 12% of the U.S. GDP, the multiplier impact is significant.

Every one manufacturing job creates seven other jobs in correlated industries. That’s why we look at new orders in manufacturing and building permits in housing as leading indicators. Manufacturing and housing have far-reaching impacts for the rest of the economy. The initial claims number is a leading indicator for the consumer, which represents 70% of the U.S. economic output – don’t be against the U.S. consumer.

It turns out that when you tune out the noise and seek attractively valued investments, there are catalysts for stronger Q4 performance in equity markets. Despite the underperformance in both the equity and fixed income markets in August and September, the sell-side has actually increased its 2023 S&P 500 EPS estimates +1.7. It is important to remember that stock prices follow profits – on the way up and on the way down. It’s encouraging to see higher earnings revisions.

Table 1: U.S. Markets Are Outperforming International in 2023, and Have Produced Double the Annualized Return Over the Last Three Years[3]

Oil Prices Above $90 Per Barrel

We are past peak driving period, so seasonality will likely bring gas prices down, but upward pressure remains due to the limited supply-side capacity. Overall, the elasticity of demand for gasoline is correlated with employment, which continues to be tight. Upstream companies are very well-positioned from the supply side because of the capex discipline and reduced financing. The average gas price nationwide is $3.83.[4]

Chart 3: Oil Prices Down -25% Since Mid-2022, but Up +37% Since Mid-2023[5]

Nike and the China Consumer

Nike (NKE) reported its fiscal 2024 first quarter earnings and beat expectations ($0.94 vs. $0.75), and higher gross margin drove a jump in its stock price. Improving inventory contributed to the better-than-expected gross margins. Higher costs and currency headwinds (strong USD) were blamed for margin pressure, but the company managed to offset it with price increases.

Nike brand rose 2.5% y/y and saw ASPs rise in every geographic area. China, which represents 13% of total revenue, saw a 12% y/y increase in sales on a constant currency basis. In fact, this was the second quarter in a row where the company posted DD revenues. This has been a huge theme for us – the reopen and the reawakening of the Chinese consumer. And it correlates with better overall demand from cosmetics to gaming. Inventories fell 10% overall. This bodes well for not only Nike, but overall retailers. 

Costco (COST) shared similar themes in its Q4 earnings beat, with memberships growing +8% y/y and many moving to a higher-tier membership with more perks. Customers are preferring brick and mortar over e-commerce. Overall, grocery items and home appliances are driving sales for the big box retailer.

Bond Markets

U.S. bonds declined to start the week, with the 10- and 30-year leading the selloffs and making new highs, but quickly rallied to close the week after core PCE came in better than expected, decelerating to 3.9% from 4.3% over the past year. The y/y increase for core PCE was the slowest 12-month pace in almost two years.

Market participants and the Fed continue to diverge in the rate path through year-end, with policymakers continuing to pencil in one more hike, while the fed funds future now sees only a 36% chance, down from 50% last week. High yield spreads widened last week to +428. Muni yields continue to follow Treasuries higher, rising 16-27 bps across the curve.

The Week Ahead

Earnings – Tuesday: MKC; Thursday: CAG, STZ.

Economics –Monday: ISM Manufacturing (September); Tuesday: JOLTS Job Openings (August); Wednesday: ISM Services (September), ADP Employment Survey (September), Final Durable Orders (August); Friday: Nonfarm Payrolls and Unemployment (September).

Return for Selected Indices^[6]

		% Change
Index Name	End of Week	Week	Month	YTD
S&P 500 INDEX	4,288	-0.71%	-4.90%	13.06%
NASDAQ COMPOSITE	13,219	0.07%	-5.65%	27.11%
DOW JONES INDUS. AVG	33,508	-1.34%	-3.85%	2.73%
RUSSELL 1000 INDEX	2,351	-0.58%	-4.78%	13.00%
RUSSELL 2000 INDEX	1,785	0.55%	-6.04%	2.51%
FTSE 100 INDEX	7,608	-0.89%	1.94%	5.25%
HANG SENG INDEX	17,810	-1.37%	-3.10%	-6.83%
NIKKEI 225	31,858	-1.08%	-0.87%	24.34%

				% Change
Index Name	YTW	Spread	Duration	Week	Month	YTD
U.S. TREASURY	4.85%		5.99	-0.64%	-2.05%	-1.52%
U.S. AGGREGATE	5.39%	+54 bps	6.24	-0.96%	-2.38%	-1.21%
U.S. CORPORATE INV. GRADE	6.04%	+119 bps	7.00	-1.18%	-2.50%	0.02%
U.S. CORPORATE HIGH YIELD	8.88%	+403 bps	3.99	-0.42%	-1.10%	5.86%
U.S. MUNICIPAL BOND INDEX	4.32%		6.74	-1.53%	-2.84%	-1.38%

Click here to read last week’s Market Note (9/25).

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 September 30, 2023.

[2] Source: FactSet (chart). As of September 30, 2023.

[3] Source: FactSet. As of September 30, 2023.

[4] Source: Fox Business. As of September 28, 2023.

[5] Source: FactSet (chart). As of September 30, 2023.

[6] Source: Bloomberg. As of October 1, 2023.