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Weekly Market Performance — October 4, 2024

J. J. Wenrich CFP®

Markets Blog

David Matzko, LPL Research


U.S. stocks edged lower this week, pausing a sting of weekly gains after securing monthly gains on Monday, defying historical trends of weak September returns. Fluctuating rate cut bets weighed on markets, while escalating tensions between Israel and Iran paired with U.S. port strikes acted as overhangs on investor sentiment. International markets were also dragged down by geopolitical risks; however, a blowout U.S. jobs report on Friday aided sentiment in the U.S. and Europe. Treasury yields jumped on Friday’s labor data, while oil and gold prices advanced as the world awaits the size and scope of Israel’s response to Iran.


Index Performance

Market performance by index.

U.S. and International Equities


U.S. Equities: Major indexes were able to buck the historical trend of weak September returns, locking in monthly and quarterly gains on Monday. However, following a string of weekly gains, U.S. stocks lost steam amid key jobs data and geopolitical tensions. Major indexes trimmed weekly losses on Friday, all ending around 0.1% lower. Growth and value stocks edged lower, nearly mirroring weekly returns, while small caps also declined.


After receiving a jumbo rate cut from the Federal Reserve (Fed) in September, markets debated the size of the next Fed rate cut in November. The 0.25% versus 0.5% debate was alive and well to start the week, however, hopes for another 0.5% rate cut were dampened after Fed Chair Jerome Powell stated future cuts will not be rushed. Signs that the labor market is slowing, while not cratering, were further reinforced after Friday’s slate of jobs data blew out estimates, nearly arriving better than expected across the board, continuing to dent jumbo rate cut hopes. Highlights included the unemployment rate arriving at 4.1% versus 4.2% expected, and a sharp increase in nonfarm payrolls.


Energy stocks outperformed the broader market after Iran launched a missile barrage on Israel on Tuesday, causing oil prices and oil producer stocks to climb. Markets and investors awaited the size and scope of Israel’s response after oil production facilities were identified as a potential target, acting as an overhang on broader sentiment and pushing oil prices higher throughout the week. Port strikes were resolved quickly but certainly did not help investor sentiment.


International Equities: Similar dynamics were also in play in Europe. European stocks closed lower on weakened sentiment from geopolitical events, despite a jump after U.S. jobs data, while oil stocks were propelled higher on Israel-Iran tensions. Meanwhile, European Central Bank (ECB) rate cut hopes were bolstered after the Eurozone Consumer Price Index (CPI) came in below the ECB’s 2% goal for September, however stocks did not react positively to the news. In political news, French President Emmanuel Macron endorsed taxes on France’s largest companies in efforts to battle the country’s deficit.


Asian markets ended the week lower amid holiday-thinned volume, with mainland China closed most of the week for holidays, and Taiwan shuttering exchanges for two days due to typhoon Krathon. Nonetheless, mainland China rallied another 8% on Monday before the holiday break. Hong Kong pulled back briefly on Thursday on overheated technicals after returning from holiday before bouncing back with a solid rally on Friday. Asian market sentiment was also broadly dented by Middle East tensions, as Japan, South Korea, and Taiwan all closed lower. India and Australia also closed lower, while New Zealand reached positive territory ahead of an expected rate cut next week.


Fixed Income, Currency, and Commodity Markets


Fixed Income: The Bloomberg U.S. Aggregate Bond Index ended the week lower. Prices were tracking lower (yields higher) through Thursday afternoon, but Treasury yields experienced significant jumps (prices lower) after Friday’s U.S. jobs data upside surprise. The rate-sensitive two-year yield leaped, adding 34 basis points and trading near 3.91% Friday afternoon, and the 10-year yield rose 22 basis points, ending near 3.97%.


Interest rate volatility, as proxied by the ICE Bank of America MOVE Index (MOVE), which looks at option-implied volatility across the U.S. Treasury yield curve, remains above pre-pandemic levels. A high MOVE index value signifies increased volatility in the Treasury market, potentially a sign of heightened market uncertainty, and a low MOVE index value indicates lower volatility and suggests that market participants expect a more stable interest rate environment. Pre-COVID-19, near-zero policy rates along with central banks actively buying large amounts of government bonds, kept interest rate volatility levels artificially suppressed. Now, with interest rates back to more normal levels and global central banks winding down still bloated balance sheets, it’s not surprising that interest rate volatility is above longer-term averages. As long as this trend continues, markets will likely continue to witness larger than normal day-to-day swings in the Treasury markets. Traders and tactical allocators may need to be nimbler to take advantage of the moves in the rates market, whereas investors can use any back-up in rates to add to high-quality fixed income. And for those investors who want to avoid elevated rate volatility, buying and holding individual bonds to maturity could be a good strategy in dealing with intra-period price swings.


Commodities and Currencies: The Bloomberg Commodities Index ended the week higher, largely propelled by oil prices. Amid heightened geopolitical tensions between Israel and Iran, West Texas Intermediate (WTI) crude oil rose nearly 10%. The increasing possibility of Israel attacking Iran’s oil infrastructure and disrupting production caused prices to climb above $75 per barrel. Gold experienced intra-week volatility, rising on Middle Eastern tensions, while receiving downward pressure from a strengthening dollar and rising U.S. Treasury yields following Friday’s blowout jobs data. Gold still traded near record highs but slipped 0.4% over the last five days. Silver advanced, helping power the Bloomberg precious metals index higher this week. The U.S. dollar index initially rose on Fed-speak indicating the central bank would not rush future rate cuts, and later received an additional boost from Friday’s jobs data.


Economic Weekly Roundup


Broad-based Payroll Gains. September payrolls rose 254,000, higher than the annual monthly average of 203,000, and fairly broad-based. Payrolls increased in most sectors such as restaurants, health care, construction, and government, pushing the unemployment rate down slightly to 4.1%. Average hourly earnings rose 0.4% from a month ago, pushing the annual gain in wages to 4%. Real purchasing power continues to increase, which is good news for businesses and consumers. Hours worked edged down to 34.2 hours in September, trending below the pre-pandemic average. This is an important metric for growth and productivity forecasts. The percentage of those holding multiple jobs rose to 5.3%, and the last time this ratio was higher was early 2009, when the economy was in the midst of the Great Financial Crisis.


This solid report increases the odds that the economy will continue to grow above trend in the next quarter. Our base case is the Fed will cut by a quarter point at the next few meetings. Further, this solid payroll report validates a potential half-point reduction in fed funds was completely unwarranted. The fed funds futures market is responding accordingly, and the only caution flag could be the rise in those with multiple jobs.


ISM Services Mixed Bag. Prices paid in September accelerated from last month as employment shrank, a rough combination for businesses. Employment contracted for six out of the last eight months as businesses pulled back on filling openings. In a positive sign, new orders rebounded sharply, now the highest since February 2023. Overall business activity improved, likely in response to the Fed’s pivot to ease up on interest rates.


Investors should monitor inflation dynamics as the Fed intensifies their efforts to keep the job market from deteriorating. Although not our base case, markets are increasingly worried about inflation reaccelerating during a time when the Fed wants to cut rates.


Job Openings Rose and Spending Grew in Home Improvements. Openings-to-Unemployed Ratio rose in August, but still at pre-COVID 19 norms. Residential construction spending contracted again as construction spending on both single-family and multi-family projects dried up. Remodeling and home improvement spending keeps growing as homeowners stay put and invest in their biggest fixed asset. In a separate report, the quits rate for lower-skilled workers fell to the lowest in roughly a decade as these workers were less inclined to quit amid a slowing job market. Employment demand is slowing, especially in the manufacturing sector, as firms are implementing hiring freezes.



The Week Ahead

The following economic data is slated for the week ahead:

  • Monday: Consumer Credit (Aug), Monthly Budget Statement (Sep)

  • Tuesday: NFIB Small Business Optimism (Sep), Trade Balance (Aug)

  • Wednesday: MBA Mortgage Applications (Oct 4), Wholesale Trade Sales (Aug), Wholesale Inventories (Aug final), FOMC Meeting Minutes (Sep 18)

  • Thursday: CPI (Sep), CPI ex Food and Energy (Sep), CPI Index NSA (Sep), CPI Core Index (Sep), Real Average Hourly Earnings (Sep), Real Average Weekly Earnings (Sep), Initial Jobless Claims (Oct 5), Continuing Claims (Sept 28)

  • Friday: PPI Final Demand (Sep), PPI ex Food and Energy (Sep), PPI ex Food, Energy, Trade (Sep), University of Michigan Sentiment Report (Oct preliminary)








IMPORTANT DISCLOSURES


This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors. To determine which investment(s) may be appropriate for you, please consult your financial professional prior to investing.


Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk.


Indexes are unmanaged and cannot be invested into directly. Index performance is not indicative of the performance of any investment and does not reflect fees, expenses, or sales charges. All performance referenced is historical and is no guarantee of future results.


This material was prepared by LPL Financial, LLC. All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.


Unless otherwise stated LPL Financial and the third party persons and firms mentioned are not affiliates of each other and make no representation with respect to each other. Any company names noted herein are for educational purposes only and not an indication of trading intent or a solicitation of their products or services.


Asset Class Disclosures –


International investing involves special risks such as currency fluctuation and political instability and may not be suitable for all investors. These risks are often heightened for investments in emerging markets.


Bonds are subject to market and interest rate risk if sold prior to maturity.


Municipal bonds are subject and market and interest rate risk and potentially capital gains tax if sold prior to maturity. Interest income may be subject to the alternative minimum tax.


Municipal bonds are federally tax-free but other state and local taxes may apply.


Preferred stock dividends are paid at the discretion of the issuing company. Preferred stocks are subject to interest rate and credit risk. They may be subject to a call features.


Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.


Mortgage backed securities are subject to credit, default, prepayment, extension, market and interest rate risk.


High yield/junk bonds (grade BB or below) are below investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.


Precious metal investing involves greater fluctuation and potential for losses.

The fast price swings of commodities will result in significant volatility in an investor's holdings.


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