“Known unknowns” are risks that we are aware of that are expected to occur at some point, such as a hurricane during hurricane season. Hurricane Helene, however, surprised most due to its severity and ultimate destructive path. “Unknown unknowns” are events that are both unforeseen and unexpected. Energy shocks often fall into this category. For example, since the start of heightened Middle East tensions, oil prices spiked up over 8% but have since stabilized with Brent Crude approaching $75 per barrel. The Saudi oil minister had only recently stated that prices could drop to as low as $50 per barrel if OPEC+ members don’t stick to agreed-upon production limits. War-related destruction of oil production facilities or trade constrictions in the Persian Gulf could change the oil equation, although for now it looks like excess oil production capacity is available.
Strike One
Dockworkers walked out of every major port on the US East and Gulf coasts on Tuesday for the first time in nearly 50 years, staging a strike that could ripple across the economy and cause political turmoil just weeks before the presidential election. The 36 affected ports have the combined capacity to handle as much as half of all US trade volumes, and the closures immediately halt container operations and auto shipments. There is relatively less impact on bulk agricultural and commodity products. The economic loss from the shutdown could be more than $4 billion per day, so not insignificant Walmart#, IKEA, and Samsung are the largest volume importers on East and Gulf Coast ports and most likely to be impacted. This could be characterized as a rare black swan event, although many retailers and distributors began stocking up in advance.
The strike centers around both pay and potential automation, and comes alongside several other recent organized-labor strife. Boeing’s machinists’ union is striking, and the automaker Stellantis is ready to authorize a strike. The 1947 Taft-Hartley Act allows the President to intervene in labor disputes that involve national security, though the administration is currently maintaining a hands-off stance. If this drags on too long, that will most likely change. One “known known” is that we have an election coming up!
Hybrids are hot, but jobs and factories are lukewarm
U.S. automakers reported a drop in their third-quarter sales on Tuesday, hurt by fewer selling days and weaker consumer spending. General Motors#, reported a 2.2% fall in quarterly sales as demand weakened for some of its big pickup trucks. Toyota reported an 8% decline in sales but said it had built extra inventory of vehicles and parts ahead of the U.S. port strikes to minimize disruption. Chrysler-parent Stellantis reported a 20% drop in U.S. quarterly sales as well.
Ford reported that U.S. new vehicle sales were relatively flat in the third quarter, rising only 0.7% from the prior year. Ford reported sales of trucks rose 6% in the last three months compared with last year, while sales of SUVs declined by 5.6%. F-150 hybrid sales rose 64% in the third quarter to 20,129 vehicles, while sales of the hybrid Maverick, a compact pickup, saw an increase of 22% to 16,561. Electric vehicle sales may be less than supercharged, but hybrids offer a reasonable middle ground for consumers. Overall, U.S. new vehicle sales in September stood at around 1.17 million units, which represents a seasonally adjusted annual rate of 15.77 million vehicles. While interest rates on loans have declined somewhat, if you purchased a vehicle on average about six years ago, affordability and sticker shock are major surprises.
The government’s JOLTS (Job Openings and Labor Turnover Survey) release indicated that the tightness in the labor market is still in place, though easing. Job openings rose to 8.04 million in Aug from 7.71 million in July. There were 1.13 job openings for every unemployed person in August compared to 1.08 in July. Resignations were the lowest in four years, a sign that workers are growing less confident in the jobs market. The Institute for Supply Management’s factory gauge held at 47.2 for last month, extending a period of softness. A reading below 50 indicates contraction. US manufacturing activity shrank in September for a sixth month, reflecting weak orders and declining employment. Construction spending also fell in August as companies scaled back projects across the U.S. ahead of the Federal Reserve’s decision to cut its benchmark interest rate.
A Defensive Third Quarter
With all of the caution economywide, the S&P 500 gained 5.5% in the third quarter, led by more defensive sectors such as utilities, industrials, healthcare and consumer stocks. This is a departure from the last few years when the S&P 500 performance had been dominated by the strength of the Magnificent 7 technology names such as Apple# and Microsoft#. Not bad considering that over the past 30 years, the annual return of the S&P500 has averaged about 8.8% per year.
September nonfarm payrolls come out Friday with consensus for an increase of about 140K, though the unemployment rate is expected to tick up slightly to 4.3%. Investors can deal with known risks, but the unknown unknowns that arise can throw a temporary wrench into the works. Markets are near record highs, so unknown and unwelcome surprises may not be received well. Lower interest rates provide some cushion, but corporate earnings need to come through as expected. The upshot is that this may provide a window for longer-term investors to look for longer-term opportunities. That we know.
Singer Gwen Stefani no doubt turns 55 today, and Scream star Neve Campbell turns 51.
Christopher Crooks, CFA®, CFP® 610-260-2219