Upward Climb: Path Ahead Could Be Treacherous Amid Fed Speakers Jobs Data, D.C. Uncertainty

(Wednesday market open) A break in the clouds early Wednesday opened the door for premarket gains in the major stock indexes as yields, the dollar, and crude oil all stepped back. However, Federal Reserve speakers, uncertainty in Washington, and economic data could darken the horizon.

Wall Street is treating good news like bad news—again. The market’s still buzzing about Tuesday’s far better-than-expected Job Openings and Labor Turnover Survey (JOLTS) report. Treasury yields galloped and stocks plummeted on the data as investors began pricing in more potential for a rate hike in November and the possibility that Friday’s September Nonfarm Payrolls report could be surprisingly robust.

Chances of a November rate hike, below 20% last week, hit 30% soon after Tuesday’s jobs data, according to CME futures, but backtracked to 25% this morning. The 10-year Treasury note yield reached 4.8% for the first time since August 2007.

High rates can hurt banks and other financial companies, putting their margins under pressure. The KBW Regional Bank Index (KRX) dropped over 2% to a two-month low yesterday. Small-cap stocks also are more vulnerable to high borrowing costs, and the small-cap Russell 2000 Index (RUT) starts Wednesday at its lowest level in six months. The Dow Jones Industrial Average ($DJI) is now negative for the year for the first time since early June. Stock market volatility is the highest since late May.

Morning rush

• The 10-year Treasury note yield (TNX) dropped 3 basis points to 4.77%.
• The U.S. Dollar Index ($DXY) eased slightly to 106.8.
• Cboe Volatility Index® (VIX) futures are knocking on the door of 20 at 19.79.
• WTI Crude Oil (/CL) fell to $87.66 per barrel and are down sharply over the last week.

The recent spike in 10-year Treasury note yields to 16-year highs reflects multiple factors: increased supply from the U.S. Treasury; recent hawkish Fed comments and projections; mounting worries that inflation and high interest rates could last well into 2024; and the Federal Reserve’s quantitative tightening (QT) policy.

It’s not just the height of yields hurting stocks. It’s how quickly they’ve risen.

“Rate volatility matters more than just levels,” said Kevin Gordon, a Schwab senior investment strategist, speaking on CNBC yesterday. “You’ve gone back into extreme negative correlation between bond yields and stock prices broadly for the S&P 500 but especially for certain areas like info tech and utilities. Anytime there are moves to the upside like what we’ve seen with the rapid rise in the 10-year yield, it will put a lot of downward pressure on equities.”

He compared the Treasury market volatility of the last 30 to 60 days to last October and earlier in 2022. Any stabilization in yield volatility, oil, or the dollar, he adds, “would probably help alleviate some of the stress we’re seeing.”

Just in

The ADP National Employment Report, which tracks private-sector jobs, says 89,000 jobs were created in September. That’s well below Wall Street’s consensus of 150,000, but the ADP report shouldn’t be seen as a predictor of what the government’s official Nonfarm Payrolls data will reveal on Friday.

The ousting of House Speaker Kevin McCarthy late Tuesday is another factor potentially at play on Wall Street today, mainly because it means more political uncertainty with only six weeks left until another potential government shutdown.

What to watch

Today’s Institute for Supply Management (ISM) Non-Manufacturing Index could have an impact on trading because the services sector that it tracks is where inflation has been more pronounced recently. Analysts expect a headline of 53.7%, down from 54.5% the prior month, according to Briefing.com. Any reading above 50% signals expansion. Keep an eye on the prices component of the report, which has been elevated lately. A pullback might help soothe inflation-weary investors.

Inside jobs: Yesterday’s JOLTS report was only the first in a long line of key labor market data this week leading up to Friday’s September Nonfarm Payrolls report. It’s now expected to show jobs growth of 170,000, down from 187,000 in August but up from expectations earlier this week, according to Trading Economics. Digging deeper, analysts expect the September unemployment rate to be 3.7%, down from 3.8% in August, and hourly wage growth of 0.3%, from 0.2% in August. Yearly earnings growth is seen at 4.3%, the same as in August.

Turning back to JOLTs, the Fed wants to see job openings narrow the gap with available workers. The gap fell for months until there were roughly 1.5 job openings for each available worker. Now it’s going the other way, rising to 9.61 million in August and raising concerns that demand remains hot, which could contribute to inflation as employers compete for workers, possibly offering wage increases.

Claims company: JOLTS also aligned with recent weekly Initial Jobless Claims, which descended to nearly nine-month lows of around 200,000 the last few times. Tomorrow’s claims are likely to get a close look, and another low number might be viewed as further confirmation of firm jobs demand. Consensus on Wall Street is 225,000, according to Briefing.com, up from 204,000 last week. The low claims could suggest the average Wall Street estimate for Friday’s headline jobs growth is too light.

OPEC on deck: OPEC and allies meet today and could decide on output, though media reports this morning say no production changes are likely. There had been scuttlebutt that OPEC might loosen its taps as high crude oil prices threaten global economic growth. Whatever emerges from OPEC could influence energy sector stocks, gas prices, consumer spending, and corporate margins.

Stocks in spotlight

The Q3 earnings season begins next week, highlighted by a host of big bank earnings that Friday. Other expected earnings that week include PepsiCo PEP, Walgreens Boots Alliance WBA, Delta Airlines DAL, and Domino’s Pizza DPZ.

“Perhaps earnings will be the catalyst the stock market needs to overcome or at least stem this slump,” says Randy Frederick, managing director of trading and derivatives at the Schwab Center for Financial Research.

Eye on the Fed

Early today, the probability that the Federal Open Market Committee (FOMC) will raise its benchmark funds rate from its current 5.25% to 5.50% target range following its October 31–November 1 meeting was 25%, according to the CME FedWatch Tool. That’s down from near 30% earlier this week. Odds that rates could be a quarter-point higher coming out of the December 12–13 meeting were about 40%.

Fed speakers are out in force today, and most of the ones who’ve spoken lately maintained their hawkish views.

Talking technicals: The 200-day S&P 500® Index (SPX) moving average near 4,200 might represent technical support, Schwab’s Frederick notes. Also watch 4,292 if the SPX pushes toward that again. It marks the level where the market was declared a bull back in June. Farther below the market is the 10% correction level of 4,130.

Consumer corner: Though sentiment among U.S. consumers remains relatively resilient, a variety of forces might be chipping away at this key pillar of economic support. In their latest article, Schwab Chief Investment Strategist Liz Ann Sonders and Senior Investment Strategist Kevin Gordon look more closely at the state of the consumer and which metrics might affect sentiment in the months to come.

CHART OF THE DAY:  IDES OF MARCH. For the first time since March, the S&P 500 Index (SPX-candlesticks) is in danger of falling below its 200-day moving average (blue line). Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Thinking cap

Ideas to mull as you trade or invest

Bull staggers: If you needed any reminders that this is the weakest start to a bull market since World War II, Tuesday likely jogged your memory with more brutal trading. Stocks are now up just 10% for the year, though the SPX is still up more than 17% from last October’s bear-market low below 3,600. The definition of a bull market is a 20% rise from the last bottom, and the bull market began when the SPX rocketed through 4,292 on June 9. At one point in late July, the SPX had risen nearly 20% this year alone and 28% from the October 2022 bottom, but that’s a faded memory now. That 28% rise, by the way, is poor compared with recent bull markets in more ways than one. The average bull market since 1942, including this one, featured 166% gains from bottom to top, though there’s no guarantee the late-July high is the peak, of course. Also, all postwar bull markets featured better “breadth” than this one, meaning a rising tide lifted most boats. For instance, when stocks emerged from the deep trough in late 2008 and early 2009, at least 90% of S&P 500 members traded above their 200-day moving averages by the middle or late part of that year. This year, we never even reached 80%. A sick bull isn’t necessarily a dead bull, but this one doesn’t feel particularly hale and hearty.

Valuation measures: There’s a lot of talk about a Q4 rally, and that’s certainly possible, especially after the broader market suffered back-to-back monthly losses in August and September. But a rebound is far from assured for several reasons. First, valuations remain high. The SPX recently traded near an 18 price-earnings (P/E) ratio on a forward basis, right near the five-year average. Some might think that’s positive after the P/E moved above 20 in July. However, with 10-year Treasury yields topping 4.7%, it’s constitutionally more difficult for the stock market to trade at even an average valuation because higher yields suggest less chance for earnings growth in the future. Also, many prominent individual stocks remain stretched from a P/E standpoint. This could mean more valuation-related pressure ahead.

Rally flag: Another possible turning point is the approach of earnings season. While earnings could shift attention from the constant focus on rising rates, the firm dollar, and high oil prices, it’s also possible earnings calls could dwell on these matters and how they’re negatively affecting companies and their customers. This could show up in guidance for Q4 and beyond, especially in the potential impact on holiday shopping. Also, higher costs for companies could mean pressure on some to trim or even toss away dividends.

Calendar

Oct. 5: August Trade Balance and expected earnings from Conagra (CAG).

Oct. 6: September Nonfarm Payrolls.

Oct. 9: No major earnings or data expected.

Oct. 10: August Wholesale Inventories and expected earnings from PepsiCo (PEP).

Oct. 11: September PPI and Core PPI. 

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

Charles Schwab & Co., Inc. (“Schwab”) and TD Ameritrade, Inc., members SIPC are separate but affiliated subsidiaries of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank.

TD Ameritrade® commentary for educational purposes only. Member SIPC.

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