Key Takeaways
- Strong Jobs Report Fuels Market Optimism Despite Geopolitical Uncertainties
- Earnings Season And CPI Data Drive Focus Amid Volatile Week
- Oil Surge And Inflation Fears Threaten Economic Stability And Markets
A stronger than expected jobs report on Friday further eased fears of a slowing economy and allowed markets to stage impressive rallies to end the week. The S&P 500 closed higher by 0.9% and the Nasdaq Composite gained 1.2%. For the week; however, markets were little changed. That came despite a wide trading range overall. As we head into this week, the expected move in the S&P 500 is 86 points, which means we could see a total trading range even bigger than last week.
It’s going to be a data heavy week with much of it being of the qualitative variety. Fed members will be speaking throughout the week but what I think will be most interesting is the release of minutes from the last Federal Reserve Open Market Committee (FOMC) meeting, due out Wednesday. These will be the minutes from the meeting at which the Fed decided to cut rates by half a point. With another Fed meeting not scheduled until November, I think a lot of investors are eager for a closer view into the last meeting and what members were thinking moving forward. I think this is especially true in the wake of Friday’s jobs report and the response out of the bond market where we’ve seen yields on the 10-year note climb back above 4% for the first time since August. Then later in the week, on Thursday and Friday, we’ll get the most recent Consumer Price Index (CPI) and Producer Price Index (PPI) reports.
Also on Friday, we’ll kick off earnings season. JP Morgan and Wells Fargo are both scheduled to announce earnings and each bank offers a slightly nuanced view into the health of the economy. JP Morgan will likely discuss the health of consumers, spending habits and credit card debt. Wells Fargo often provides a look into the housing sector given their presence in the mortgage market.
As we prepare for a deluge of earnings over the next few weeks, it’s worth noting the expectations for the quarter have fallen. At the end of June, estimates for third quarter earnings were a growth rate of 7.8% on a year-over-year basis. However, those estimates have since fallen and now stand at 4.2%, according to FactSet. While it is common to see estimates revised downward, these revisions are slightly larger than the average drop of around 3.3%. It’s also worth noting that the S&P 500 is currently trading at 21.4x its expected 12-month forward-looking earnings, which is above its historical 10-year average of 18x and 5-year average of 19.5x. In other words, much like we saw at the end of the second quarter, stocks are fundamentally valued at levels above their norm.
The revised earnings growth rates and fundamental valuations may also explain the tempered enthusiasm for company stock purchases by insiders. An article in today’s Wall Street Journal says insider purchases by officers and directors were at their lowest level in a decade. While purchases upticked in August and September, they are still below their 10-year average.
In addition to the economic news and earnings, we also have a couple other externalities that could make their way into the market this week. Oil, which was up 1% on Friday and 8% for the week, is something I’ll be watching as the world continues to await possible continued escalation between Israel and Iran. Also, back here at home, we are less than thirty days away from the election and I would not be surprised if we see market volatility hold its current level of even increase as the election nears.
A couple individual stocks worth watching today include Chevron and Pfizer. Chevron is selling off some Canadian assets as part of a plan intended to divest between $10 to $15 billion by 2028. That stock is higher by just over 1% in premarket. Shares of Pfizer are higher by nearly 3% in premarket after it was announced that activist investor Starboard Value has taken a $1 billion position in the company.
For today, I am keeping my eye on oil and any news out of the Middle East. I think markets are already bracing for the economic data and upcoming earnings, but the geopolitical situation is the wildcard I’m most focused on. No one is entirely sure what response to expect from Israel and I think that adds a bit of volatility that’s more difficult to quantify. As always, I would stick with your investing plans and long-term objectives.
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