Weekly Market Update: October 17, 2022
The nation added 263,000 jobs in September. In total, nonfarm payrolls increased by more than 3.75 million positions during the first nine months of 2022. Likewise, the unemployment rate fell to 3.5%, matching the June reading as the lowest level on record. These reports clearly indicate that the U.S. labor market remains tight.
These figures were probably not what the Federal Reserve wanted to see at this stage of the monetary policy tightening cycle. In particular, the average hourly wage rose 0.3% last month and advanced 5.0% over the 12-month period ended September 30th. The labor force participation rate was little changed at 62.3%. This suggests wage growth is likely to continue in the near term, which does not help the central bank in its battle to combat inflation. On point, the Producer Price Index rose 8.5% year-over-year in September.
The solid labor market data put renewed upward pressure on Treasury market yields. In part, this reflects continued sentiment that the Federal Reserve will remain on its increasingly restrictive monetary policy course next month, with another three-quarter-point hike to the federal funds rate, to a range of 3.75%-4.00%, expected. As has been the case in 2022, rising lending rates are pressuring the stocks of the higher-growth companies, particularly those in the technology and consumer discretionary sectors.
The next big event for Wall Street is third-quarter earnings season. That was about to kick off as we went to press, with the big banks providing the first look at how Corporate America is faring in this higher-interest-rate and stronger-dollar environment. Leading into earnings season, more S&P 500 companies issued negative than positive third-quarter earnings guidance. According to FactSet Research, the estimated earnings growth rate for the S&P 500 companies was 2.4%. That performance would mark the lowest growth since the third quarter of 2020. Many of these companies, with significant overseas business, will be hurt when foreign earnings are translated back into U.S. dollars.
In conclusion: We continue to recommend that investors proceed with caution. The “don’t fight the Fed” mantra still remains very much in place, as central bank policymakers plan to continue hiking interest rates in an effort to fight inflation. This, combined with a likely drop in corporate earnings growth rates, may put a damper on stock valuations.