Goldilocks Jobs Report: Not Too Hot and Not Too Cold

Jeffrey Buchbinder (00:00):

Hello everyone, and welcome to the latest edition of LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Quincy Krosby. How are you today, Quincy? How was the long weekend?

 

Quincy Krosby (00:11):

I'm fine. Oh, yeah, but I still think it's Monday, but you've gotta keep me straight. It's Tuesday morning.

 

Jeffrey Buchbinder (00:18):

I think a lot of us have a case of the Mondays, even though it's Tuesday. Yeah. I hope you all had a really nice long weekend. It sure feels like summer here in Boston because we have 90 degrees or so for the high today. So might not quite be done with the pool for the year. But certainly kids are back in school pretty much everywhere at this point. So yeah, it does feel like, like summer is over. So here's our agenda for this week. We've got you know, of course there's always a market recap. The S&P 500 five-month win streak just ended, although we had a very strong week for stocks last week. We'll talk about scary September seasonality. Now we'll make the case that maybe this won't be quite as bad as you might think based on the historical pattern.

 

Jeffrey Buchbinder (01:12):

Next we'll have a discussion about the bond market and where yields might be headed. And then finally, the preview of the economic calendar. So let's get right into it. The you know, stocks were up really nicely last week, Quincy, I think I know the reasons why. Certainly the Goldilocks jobs report was part of the story. So the S&P 500 up 2.5%. What else do you think was was driving stocks higher last week? Or was it just as simple as that the market was anticipating, you know, a cooler jobs report and, and that helped you know, rates come down and, and the market get comfortable that the Fed might be done?

 

Quincy Krosby (01:57):

Yeah. All of the above. But the effect on the 10-year treasury yield certainly helped to underpin the the market move.

 

Jeffrey Buchbinder (02:05):

Yeah, we're gonna talk a lot about the 10-year and the bond market. That's the subject of the Weekly Market Commentary, which is available on lpl.com. I mean, we said it last week that really the most important thing for stock investors to watch is probably the tenure, right? The bond market is driving the bus so to speak. So we'll be watching the bond market very closely and what that means for Fed expectations. And then in turn for stock market valuations, which are of course interest rate-sensitive. So very good week last week, even though stocks were down in August slightly, the Nasdaq did particularly well. It was a growth led week. You see that on the you know, the sector table here. You had technology up over 4%.

 

Jeffrey Buchbinder (02:56):

You had communication services, which has some big tech in it, very strong week as well. And then consumer discretionary, the third place where big tech lives up over 3%. So that was really I think the biggest story of the week was growth continued to lead. Of course, growth stocks have led all year, but you had energy sneak up, right? Energy's actually the best performer over the last three months. That's a market, Quincy, that you follow really closely. I know oil was up last week and I believe natural gas. So it seems like the market is starting to recognize value in the energy sector. What do you think?

 

Quincy Krosby (03:35):

Oh, absolutely. Although I have to say, even when energy led before it, you know, pulled back dramatically we didn't see that much participation in that market. You know, we look at flows into the ETFs, it is almost an unloved, and I think people worry about it because it could be a fickle depending on China, depending on politics in DC. That's something that affects the energy market. And there are many who don't believe that the energy companies are going to stay with their, you know shareholder value theme. Not, you know, not going off on spending splurges, you know, obviously the rig count is down quite handsomely, suggesting that they're not going to do it. And they are still focused on shareholder value, returning share value to the to the shareholders. So it's interesting that it tends to be unloved and questioned. And we're going through that. We're going through that now. But prices are up this morning. Prices are up. They have inched up while we were spending Monday you know seemingly on vacation.

 

Jeffrey Buchbinder (05:01):

Yes. It's Tuesday, September 5th, 2023 as we record this. But these returns that we're showing are through Friday of last week through September 1st. So energy, you know, it used to be all about just production volume at any cost. And now for a number of reasons, one of them is the whole ESG movement.

 

Quincy Krosby (05:20):

Exactly.

 

Jeffrey Buchbinder (05:21):

Produce. But it's also just investors activists demanding better returns, right? And that has changed behavior for energy companies. And now it's more about smart production, profitable production, higher hurdle rates to take on new projects and the market. Yeah, it's starting to recognize it's not a new story, right? I mean, you see here, energy up 18% in three months, but it's really starting to take hold. And remember, you know, energy's been a year to date, laggard and energy was a you know, after being a big winner last year. So you know, maybe we can get back to that 2022 environment, at least for the energy sector. And it can reassert leadership. So turning to the international markets, I mean, Europe continues to struggle to keep up with the U.S. when the U.S. tech space does well, Europe has a really hard time keeping up.

 

Jeffrey Buchbinder (06:16):

Plus you have a European economy in, you know, overall deteriorating here, and you have a stronger dollar, but currencies are just not helping international returns for U.S. investors. And so throw that together and U.S. was clearly the place to be. We still like Japan better than Europe, and Japan actually did quite well last week, up north of 2%. And then you did see the market continuing the Asian discussion. You did see China and Hong Kong start to show signs of life in response to more stimulus. The stimulus isn't a bazooka yet, but it is starting to add up, we'll say, right? And so the market seems to finally be responding to that. And we've said a number of times here that China's a trade, not an investment.

 

Jeffrey Buchbinder (07:11):

 

Well, it looks like maybe we're on the verge of China being a good short-term trade. We'll have to see. So turning to bonds and commodities, we mentioned that the bond market is really important for stocks. And here you go. You know, bonds rallied, and then the stocks followed suit. We had about a half a percent gain in the Barclays or Bloomberg Aggregate. I do that all the time. The Bloomberg aggregate bond index has changed names so many times, I can't keep it straight. So the Bloomberg Aggregate Bond index up about a half percent. And you see broadly across the bond market, even to high yield up over 1%, you had really strong gains there as rates came down. And the market really solidified its expectations for a September pause from the Fed, and then increased the chances that we get another pause in November and turning to commodities.

 

Jeffrey Buchbinder (08:06):

 

So Quincy, here's energy again, up, this is a combination of oil and gas up over two point half percent. So really solid gains there. And precious metals don't like rising real interest rates, right? That's inflation adjusted interest rates. And yet they've been doing pretty well lately, kind of hanging in there. So, precious metals, you know, not one of our best ideas, but gold-related investments, we think certainly can make sense in small size here as a diversifier. Anything else on the commodity side, Quincy? I mean, was this just maybe a reaction to the stimulus in China, or is there something else going on?

 

Quincy Krosby (08:50):

 

Well, you had, just for example, because every positive move in the China landscape that's helping the market, think the bottom is in, the bottom is in, but you've had copper in iron ore holding in there for some time, suggesting that there would be a turnaround, maybe even a bazooka of some sort, perhaps some sort of infrastructure package. But nonetheless one of the major property developers actually made a payment. I mean, global markets were holding its collective breath to see if they could make a payment. And they actually did make a payment. So that really helped. And also, as you mentioned, the Chinese authorities people's Bank of China lowering rates on mortgages, dramatic actually quite, quite dramatically in order to, I don't know, stimulate interest in demand. And apparently, according to data, it is working. So it's targeted policy, it is monetary policy, but so far we are not seeing that big bazooka. Maybe the time will come that they feel that they have to do it, and maybe they're actually working on it. Maybe that's what copper and iron are actually telling us.

 

Jeffrey Buchbinder (10:19):

 

Yeah, that big move in industrial metals last week certainly a positive signal, at least in the short-term for Chinese economic activity. So thanks for that, Quincy. Let's just look at a chart of the S&P 500 here real quick and make the point that we're getting closer to resistance, 4,500 of roughly where we are as we're recording this. And the next resistance hurdle is 4,600. That's probably gonna be tough to get through. And then on the other side, you've got support maybe in the 43 to 43.50 kind of a range. That's August 22 highs, or the more recent June lows. I think the good news with the August pullback is that breadth was actually pretty good. You know, we've had more than 50% of the S&P 500 still above their 200 day moving average a positive signal technically.

 

Jeffrey Buchbinder (11:12):

 

And then you know, these are Adam Turnquist technical momentum indicators. Our technician at LPL, he makes a point that the m d is is signaling positive momentum. Momentum has turned bullish. So, you know, this, we're not particularly bullish on the market between now and the end of the year, but certainly on a technical analysis basis it looks pretty good here. S&P looks pretty good here. I mentioned that the five-month win streak's over, well, after you end a five-month win streak, stocks tend to keep going higher. This is a small sample size, right? But in these instances, the average gain in the subsequent six months after a five-month win streak ends for the S&P 500, you're up over 7% on average. So this is certainly a reason to think that maybe the stock market could continue to defy the skeptics and go higher.

 

Jeffrey Buchbinder (12:13):

 

You know, continuing the recap of last week. So we got a pretty good PCE report. This is the Fed's preferred inflation measure. Quincy, I mean, I think the job report might've been the bigger news story, but you see here our Chief Economist Jeff Roach breaks inflation down into goods and services. And you see here that services inflation continues to be sticky, ticked a little bit higher, but goods prices are, I mean, collapsing, right? The goods inflation component of the PCE was actually down year over year. So this is how you get to an overall 0.2% month over month increase in the core PCE. Actually, the headline and the core, were both up 0.2%. If we can string those point twos together, we're gonna be in a good place. So, Quincy, that's the question. Do you think we're gonna continue to see these tame numbers? Or is that services piece gonna remain sticky and prevent us from making more forward progress?

 

Quincy Krosby (13:18):

 

We'll have a good idea this week. We'll get the ISM service sector report. And that's extremely important because in the manufacturing, which we had last week, this is the ISM Institute for supply management, purchasing manager index. We saw prices paid higher. We need to see where that comes in in the service sector, that's going to make a big difference. But nonetheless, you're right. I mean, the trajectory is correct. The question is, how much patience is the Fed actually going to have to wait to see the untangling of the core stickiness?

 

Jeffrey Buchbinder (13:57):

 

Yeah, we do think all those apartment buildings being built will help the rent piece, but that just takes time. So, the overall PCE Dr. Roach still thinks is gonna be in the low threes by the end of the year, but we have some more work to do. The last reading was four two. So here's the job report from Friday. And you see this really nice downtrend in the three-month moving average. Not only do we have a cool number of 187 which was pretty close to expectations, but, you know, cooling side, but we had job gains in prior months revised lower. So that's created this nice downtrend, this is what the Fed wants to see. But add to that, Quincy, we got good news on labor force participation. We got good news on average hourly earning, right? It's fundamentally, it's wages that really matter, right?

 

Quincy Krosby (14:52):

 

It does. But you also have to factor in the huge package of wage gains that we've seen everything from the pilots to the UPS and now United Auto Workers to see if they can actually not go on strike, but come up with a package of higher wages. At some point, you have to envision that the companies are going to have to do one of two things. One, pass along higher prices to their end customers, whether they're retail or corporate, or did they slice headcount in order to make up for it? That's going to be something we have to watch, but it is not an immediate problem for the market to have to digest,

 

Jeffrey Buchbinder (15:39):

 

Right? So this report, you know, that's an important point about some of those labor negotiations, but this report was about as good as the market could have hoped for. And it certainly helped secure yields, right? We've gone down from, you know, four, three to four two, or at least near-term plateau in yields, right? And again, take some of those rate hike odds out of the market. We'll see what happens going forward, but that was certainly good news. Here's the 10-year yield ticked higher a little bit on Tuesday morning, but you see here you know, four, two coming off of those recent highs. If we break through four, three, these recent highs, then there's really not a whole lot of resistance until you get to four or five. And then we're talking about 15-year highs.

 

Jeffrey Buchbinder (16:28):

 

So we're gonna be watching these resistance levels really closely here. That's one of the reasons, maybe to be nervous about September <laugh>. But the, the real reason to be nervous about September is that it has a bad track record for stock market gains. Here you can see the average performance for September going back to 1950, and then over these various different time periods and it's all down, right? So you know, this certainly suggests that we could be down over the next month, but when you look at batting averages, this is just the percentage of the time. September is down, again, this goes back to 1950, and you see 43.8%. So you do have winning Septembers. It's not impossible. I mean, if it wins, it's probably not winning by much, but certainly you know, it's these seasonals tend to work, but not always.

 

Jeffrey Buchbinder (17:29):

 

The seasonality looks even better. If you look at the presidential cycle, actually. So I've got a couple of charts on this. We haven't talked about this in a while 'cause the election's a ways off still, but, year three is the best year. It's the post midterm year, right? And certainly we've delivered on, on that with the S&P up, you know, 17% year to date. If you get a new president, which of course we did this term with Biden, you get a better return typically in year three. And look what happens in year four. So this isn't about September, this is about the next year. And you see, while year four is typically down, it's typically the worst of the four-year cycle. You tend to see gains if you have a first-term president.

 

Jeffrey Buchbinder (18:17):

 

So we'll see if that plays out. Maybe to put sort of a bow on this midterm concept, though, remember the year after the midterm election years after the actual election itself. So this is November to November. We're now up, I believe, 19 straight times. I mean there's a possibility that we're down if the market absolutely collapses between now and November 8th, but we'll just assume that's not gonna happen, and that we'll be positive again, because we're up almost 20% off of that midterm election from last year. So this pattern is intact average gain of about 15%. So that's certainly good news. It's not September seasonality, but it's good news. Before we get into the bond market, though, I wanna make the point that if you come into September and the S&P 500 is above the 200-day moving average, which it is now, then on average September is up 0.2%.

 

Jeffrey Buchbinder (19:25):

 

I was kind of alluding to this earlier, right? September is usually a down month, but if you come into September with some momentum, you're more likely to be, you know, flat or up slightly. So, wanted to point that out before we move into bonds. So, so this is the Weekly Market Commentary. Quincy bull market is over, now what? So Lawrence Gillum, our Chief Fixed Income Strategist, did this this week. And it's really interesting. The next chart, and especially I think is really interesting, is the last 41 years for the 10-Year Treasury Yield. And if I look at this chart as a technician, if this was a stock market chart, I would say, wow, there's the potential to really move higher, right? Because you're breaking through some very long-term resistance. But this isn't stocks, this is yields, right? And yields are anchored. So, why should we think that this run is over in yields? Quincy, can you make the case that the 10-year yield settles in here, in the, I don't know, low force? Well,

 

Quincy Krosby (20:35):

 

If you are in the camp that this will not be a soft landing, but it could be harder than that, yield should come down, right? That's the way it works. When yields come down, that's, that's capital appreciation, is it not? So again, there is this tug of war in the market that believes if the yields now keep climbing higher, even a bit--Because remember, it's the trajectory, it is how quickly they move as opposed to ultimately what happens to the economy--but if it's quick, it'll start showing or leading to cracks in the auto industry. Forget the UAW issue. All that aside, that is one of the areas we watch because it is sensitive to rates and the economy and also the housing market. So if we start to see that higher yields start hurting the housing market in a material way, and also the auto industry, that's significant.

 

Quincy Krosby (21:43):

 

Because ultimately what that does is you start to see the 10-year yield come down because of a growth scare. We've seen that before where you see the yield come down. The market equity market is very excited about it until there's a second look at it. And it is, wait a minute, is this an indication that we are having a growth scare? So again, nothing, not recession, we don't have to get into that camp, but even the idea that a growth scare, and I'll, let me point out too, there's been tremendous questioning about the Atlanta Fed now the GDP now, because that does have a, it's fluid, obviously, all incoming data affects the the probability of the rate or the GDP that they forecast. It has already come down, but certainly not in the camp that you would expect.

 

Quincy Krosby (22:44):

 

If you think that the labor market is beginning to crack, if you think that the consumer is beginning to crack, it isn't coming down that way, but I can point this out. The 10-year yield will come down, that would be, in essence positive, but not if it is pinned to a stronger growth scare. So that's how you look at it. And you know, the other aspect, Jeff, is transitions. Transitions in a market must be watched very carefully because obviously it represents the shift, it represents an important change if the yields continue to rise, it is an indication that the market believes that the inflation is stickier than we even think right now as we do this call.

 

Jeffrey Buchbinder (23:41):

 

Good point. Yeah. We, we don't think at LPL Research that yields are gonna move much higher, you know, partly because the Fed is possibly done, or if they're not done now, maybe we'll get 25 basis points more and then they'll be done. Mm-Hmm. <Affirmative>, right? It doesn't matter when they cut necessarily, but that can put a cap on yields, and then we have yes, you know, slow growth and falling inflation, and that certainly tends to keep yields down. So, we still think we'll get into the high threes here before the end of the year. It's just maybe taken us a little more time to get there than we thought. This is a really cool chart from Lawrence. It shows yields back to 1880 and until the seventies. Yeah, this is really great.

 

Jeffrey Buchbinder (24:27):

 

So until the seventies and eighties, which were total outliers with rates spiking and inflation surging, three to 5% was normal, right? The 10-year yield was tied to nominal economic growth, right? The real GDP that we report or we follow that the government reports plus the inflation rate, right? And inflation long-term has been closer to two normal. So yeah right now, 2% growth, 2% inflation, you get to four, that's about where we think we should be, or maybe even a little bit low lower in the near term. This makes a really strong case that, you know, four or less is normal. So we'll see. Obviously we can't predict the future. The, the Q E period was abnormal, took us down, well below three obviously, from the three 5% range, took us to a half <laugh>, right?

 

Jeffrey Buchbinder (25:24):

 

Which was just crazy. So we had craziness in the seventies and eighties. We've had craziness the last 15 years. Now we're back to normal. And we're comfortable that we're gonna stay in that normal range here. Maybe the only thing that takes us outta that normal range and in any meaningful way would be a hard landing a recession certainly you would think could take us below that 3% range. And then you you know, turn to the bond market. Here's that Barclays aggregate bond index. Again, what kind of returns do you get in different rate regimes, right? We've broken this down by decade. And then how much is coupon versus price appreciation? So you see here, the blue is coupon return, which is almost all of the return you get from the broad bond market.

 

Jeffrey Buchbinder (26:16):

 

So that tells you that these, you know, five, 6% yields you're getting in bonds, that's most likely going to come through, right? And that's what you should pay attention to when you're trying to predict what your bond returns are gonna be. Don't worry so much about calling rates, right? Rates can go up a little. They go down a little over time. You're gonna get these types of returns aligned with your with your yield. So this is, I think, an important reminder. Most of your bond returns come from come from income. So let's go ahead and preview the week ahead. Quincy. you know, it's a quiet week. You already mentioned the ISM services report is probably the most important data point of the week. But we also get consumer credit, which certainly is important now with all of the market's attention on credit card debt piling up for consumers, and a little bit of an uptick in in delinquencies. What should investors be watching this week?

 

Quincy Krosby (27:22):

 

Well definitely watch. We're gonna be watching how the consumer is handling the debt. It's extremely important because especially at transitions where we're looking and watching to see if this economy is slowing down in a material way. We have to watch to see if they're paying their mortgages on time. Are they paying their car loans on time? And then everything else. So far, I mean, we've talked about this Jeff, and so many, so many occasions we're not seeing, you know, a heavy shift towards delinquencies. But what you're watching is to see whether or not the late payments pick up in a meaningful way.

 

Jeffrey Buchbinder (28:04):

 

Yeah. And that's certainly tied to the bond market. I mean, we're not seeing evidence from the bond market that this economy is deteriorating, right? Right. You look at high yield earlier, right? You can look at credit spreads you can look at delinquencies you can look at you know, a number of different indicators. And, you know, the bond market is certainly telling us that recession's not coming anytime soon. Things could change in a couple of quarters as we get more of these headwinds maybe building up, we have the right student loan payments restarting, right? And that's an additional headwind that we haven't been dealing with recently. So, you know, the headwinds are gonna get stiffer here a little bit over the next several months and we'll see how well the consumer holds up. But to date the pictures really, really solid.

 

Quincy Krosby (28:57):

 

Yes, resilience, tremendous resilience in this economy,

 

Jeffrey Buchbinder (29:02):

 

For sure. So so there are just a couple things to watch this week. With that we'll go ahead and, and wrap up. So thanks so much Quincy for joining another LPL Market Signals. And thank you to all of our loyal listeners for listening to another podcast edition from us. Everybody, have a wonderful short week holiday, short week. Hope y'all had a nice long holiday weekend, and we'll be back with you next week for another market signals. Take care, everyone, we will see them.