The question I keep asking is, "What can happen next?" We go from a US Government shutdown (see special report two Fridays ago), to the ousting of the Speaker of the House, and now the outright attack on Israel by Hamas. This is getting quite frustrating. I had thought that maybe last Friday the economic reports would be somewhat tame, but true to recent history, economists were looking for payrolls to increase 170,000 and the number came in at 336,000! Wow! The initial market reaction was one of higher interest rates which was followed by an initial decline by the equity markets, but about midday (Friday) the interest rates sort of leveled off and the stock market turned and rocketed higher.
It appears that the type of workers that were hired were more part-time, and the number of full-time workers actually declined! E. J. Antoni, Ph.D. stated, "What kinds of jobs were added? Entirely part-time (+151K); in fact, we LOST full-time jobs (-22K); last 3 months have seen part-time jump 1.2 million while full-time fell 700K (the most since the lockdowns); double counting of multiple job holders 9123K) was 37% of job gains.... See below:
I felt that this was important to share as many are wondering why the stock market has rallied since last Friday even though both domestic news and international news has been far less than friendly. This then brings me to the next issue that occurred over the weekend. War erupted in Israel-Gaza with the invasion by Hamas. If this were to follow normal military shock type of events, there should be a flight to safety (US Treasuries) and this should cause rates to drop.
Since Monday was a bond market and banking holiday, it was impossible to know what was to happen in the bond market, but the oil pits clearly reflected that the conflict created uncertainty in the oil rich Middle East and oil prices bounced higher. At this point, this bounce in oil prices seems short lived and, as can be seen below the price of oil, still appears to be on the decline since the $95 level in the last few weeks:
This follows Biden's reversal of his stance on domestic drilling. If one is to remember, the first day he was in office he all but halted domestic oil drilling. Last week he reversed this. There are a variety of reasons why, but I think the clearest is to look at the decline in US crude oil rig count and the progression in world oil demand. If we burn off our strategic oil reserves and decrease our drilling at the same time that global demand is increasing, it is obvious why oil prices are on their way back to the $100 / barrel level:
My takeaway from the increase in oil prices, coupled with the Mid-East conflict, is that there should be strength in the US Dollar, a decrease in interest rates, and a subsequent rally in stocks- particularly after being in a substantial decline since late July. The most durable impact on stocks should be from the move in interest rates as there has been a direct inverse relationship between interest rates and the S&P 500 since rates really started to crank up in late 2022. By the time this letter has been posted, we will not have gotten both the Producer Price Index (PPI) and the Consumer Price Index (CPI) for September, so we won't know what the pricing numbers are for production and consumption to evaluate if rates have seen their high points or not (for the time being).
It feels awkward to concentrate a major part of my note on the impact from a war, the likes of which the US is not really involved with yet, and ultimately the impact on our stock market as a result. War is a tragedy and results in heartbreaking loss. And yet, in my view, I don't believe the conflict is really going to alter the ultimate recovery in US stock prices. And if interest rates do decline, whether from labor, military conflict or the latest inflation measures, the stock market should most likely get its footing and stage some level of advance. If the market does advance, the question will then be where to get the biggest bang for one's buck! To this question, the tea leaves, and the genie can be consulted, but of course we are always available for your call.
This week's note is much shorter than normal as I have gone over most everything economic and seasonal over the last number of weeks. In the next few weeks, we will be able to evaluate third quarter earnings, seasonal expectations and if a year-end rally is starting for the equity markets. Stay tuned! We certainly will be.
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