Presented by The PensionmarkMeridien Team, October 17, 2023
THE WEEK ON WALL STREET
Major U.S. stock indexes digested hotter-than-expected inflation data and tensions in the Middle East last week, finishing the week in a mixed yet resilient fashion.
Tallying the numbers, the S&P 500 added 0.45%1, the Nasdaq 100 increased by 0.15%2, and the Dow Jones Industrial Average rose by 0.79%3.
WARMING INFLATION DATA
Remember that cooling inflation trend? Wait, not so fast!
Producer Pricing Index (PPI): Producer pricing (wholesale pricing) showed a rise of 0.5%4 in September versus the Dow Jones estimate for a 0.3% rise. Markets didn’t seem to mind, with major U.S. stock market indexes showing only mild reaction and the S&P 500 finishing in the green5 last Wednesday.
But PPI was just a warm-up, or an appetizer, if you will.
Consumer Price Index (CPI):Released the next morning, consumer pricing for the month of September showed a bit hotter-than-expected data reading, at a 3.7%6 year-over-year rise versus estimates for 3.6%. On a month-over-month basis, data showed a 0.4% increase in consumer pricing vs. 0.3% expected.
Segments7 attributed to the rise included shelter (including rent) and energy. A bright spot was the price of food staying mostly stable.
While markets didn’t seem to mind the hotter PPI, CPI was a different story, with the S&P 500 finishing the daily session lower but in an orderly fashion.
At the end of the day, the consumer is the tail that wags the dog of the economy. That’s why markets care so much about CPI and not as much about PPI.
Tensions in the Middle East also picked up on the same day, so it is tough to pinpoint what the market was trading on more heavily. We do see that inflation is still sticky, however.
MODERATING TREASURY YIELDS
Treasury yields declined modestly last week, perhaps finding safe-haven demand from buyers on Middle East turmoil. The 10-year yield had its first weekly drop in the last six weeks yet remains “elevated,” closing the week near 4.628%8. We have yet to trade at or above the psychologically critical 5.000% level in the 10-year note yield during the recent rise.
There is some chatter and logic about the “market doing the Fed’s work” with traders and investors pushing yields higher in the long-duration Treasuries like 10s and 30s. The market pushing the yields higher overall can contribute to chilling the economy and potentially translate to a Fed that is less eager9 to hike shorter-term rates.
FEDWATCH
Speaking of the Fed, the November meeting is just about two weeks away, and the chances of a 25-basis-point rate hike at the meeting declined last week. As of the market close on 10/13, probabilities show a 93.8%10 chance the Fed leaves rates unchanged at the November meeting versus around 72.9% seven days prior.
When will the Fed cut rates? It’s what everyone wants to know. At the time of writing, the market favors a cutting Fed in the second half of 2024, according to the CME FedWatch Tool10.
A lot can happen between now and then, and it is unlikely to see rapidly declining interest rates anytime soon.
EARNINGS SEASON KICKOFF
Earnings season kicked off with major banks last Friday, as JPMorgan Chase, Citigroup, and Wells Fargo all reported quarterly results and growing profits11. This week gives us more bank earnings as well as Netflix and Tesla12 quarterly results.
As of last week’s market close, some analyst estimates were calling for S&P 500 earnings (blended, year-over-year) for all companies to rise by an average of 0.4% overall, according to data from FactSet13. If we get an actual earnings growth rate of 0.4% for the quarter in the S&P 500 companies, it would be the first quarter in the last four with year-over-year earnings growth.
It is a dynamic market backdrop right now: think earnings versus geopolitics14 and higher rates.
MIDDLE EAST SENDS OIL, GOLD HIGHER
After one week of notable declines in crude oil pricing, the Middle East had different plans last week.
The price of U.S. Crude Oil (West Texas Intermediate) rose last week, with the November contract higher by 5.92%15, closing the week near $87.69 per barrel versus the previous weekly close near $82.79.
In classic geopolitical fashion, gold also rose on the Comex Exchange last week, with the December contract adding 5.22%16 to close near $1941.50 per troy ounce. Most of last week’s gains in gold came on Friday, as tensions escalated in the Middle East ahead of the weekend.
Gold may present a unique opportunity for certain investors with outlooks for a more dovish Fed in the future (think 2024 – 2025). Overall, during the Fed tightening cycle, the price of gold has held up rather well17 (better than many would have expected), even with many investors opting for interest-bearing fixed income.
THE TAKEAWAY
Picture a fulcrum or a seesaw. It feels like we are at or close to an inflection point in the markets, with one side having the prospects for a softer Fed sometime in 2024 and the other having presently elevated rates and inflation with a new weighty factor: the Middle East.
Earnings season is picking up steam this week, and we now have the new geopolitical variable of the Middle East, along with the opportunities that could potentially result from it.
With that said, we will get some fresh clues on the consumer Wednesday in the form of retail sales data for September. We’ll see if the month-over-month data can continue its recent estimate beats.
We will also pay close attention to what’s happening in the Israel-Hamas war, as our hearts continue to go out to those affected by the recent disturbing tragedies.
As things continue to develop this week and moving forward, if there is anything on your mind regarding the markets or your portfolio, shoot us an email or give us a call.
We are always here as a resource for you.
The PensionmarkMeridien Team may be reached at 866-871-9963 or meridienteam@pensionmark.com
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Pensionmark® Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark® is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).
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This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and they should not be considered a solicitation for the purchase or sale of any security.
Citations:
1. Trading View, October 14, 2023
2. Trading View, October 14, 2023
3 Trading View, October 14, 2023
4. CNBC, October 11, 2023
5. Trading View, October 14, 2023
6. CNBC, October 12, 2023
7. U.S Bureau of Labor Statistics, October 12, 2023
8 Trading View, October 14, 2023
9. PBS news Hour, October 9, 2023
10. CME Group, October 16, 2023
11. Finance, October 13, 2023
12. Investor’s Business Daily, October 15, 2023
13. Factset, October 13, 2023
14. NASDAQ, October 10 2023
15. Trading View, October 14, 2023
16. Trading View, October 14, 2023
17. Gainsville Coins, October 3, 2023
Pensionmark® Financial Group, LLC (“Pensionmark”) is an investment adviser registered under the Investment Advisers Act of 1940. Pensionmark® is affiliated through common ownership with Pensionmark Securities, LLC (member SIPC).