Stocks rallied Friday in a rather volatile seesaw session after the release of the September employment report. On the surface the surprisingly large jump in the number of workers reported in the payroll survey spooked investors, suggesting that surprising economic strength would force the Fed to raise interest rates once again. But beneath the surface, the numbers within the report were actually quite favorable. More about that in a moment. Suffice it to say for now, the combination of lower wage growth and more modest growth numbers within the household survey, made investors feel better. The Dow, after falling more than 200 points at the start, rallied to a 400-point gain before retreating a bit into the close.
If that was to be the end of the August-September correction, events over the weekend stopped that in their tracks. The surprise invasion of Israel by Hamas militants opened up the largest conflict since the Yom Kippur war almost precisely 50 years prior. Both took place on Jewish holidays and during the sabbath. I will stay away from the politics of the conflict but instead make the following points:
1. Wall Street hates uncertainty. No need to say more than that.
2. It is unclear whether this will be contained as a war/conflict between Israel and Hamas or will spread wider across the Middle East.
3. Given that Iran played a clear role in support of Hamas, it is likely that sanctions against Iran and supporters will increase. Oil prices have rebounded over the weekend but are far below last week’s peak.
4. The future of improved Saudi/Israeli relations must be questioned at least until there is more clarity.
5. At first blush, none of this is likely to improve the popularity of the Biden administration, especially after the recent release of $6 billion of Iranian oil money. While those funds are earmarked for humanitarian purposes, money is fungible. Critics, right or wrong, are going to lay blame on Washington. The ultimate public reaction is still in doubt pending the outcome of events of the last two weeks.
Nothing that happened overseas should have an immediate economic impact on U.S. companies or monetary policy. As noted above, oil prices popped a bit over the weekend but neither Israel nor Gaza are oil producers. Iran may be isolated further but nothing that has happened so far is likely to have a real impact. If the conflict spreads across a wider swath of the Middle East, that might change, but at the moment, that is a hypothetical and not a base case assumption. Thus, unless there is a broad escalation beyond what one might logically expect, the focus on Wall Street will quickly return to concerns about earnings and inflation.
The other current headline event that overhangs everything is the debacle surrounding House leadership. Logic suggests that Republicans would like to find a quick solution. A protracted battle to select the next Speaker would be viewed negatively by all. That doesn’t mean a quick settlement is near. I would also expect that part of the process of selecting the next Speaker will include modification of the rule allowing one member to put forth a motion to vacate the chairmanship. With that said, it is a lot easier to apply logic to economics that to politics. Suffice it to say it will be an interesting week in Washington. With that said, the House (meaning the Republicans who are in the majority) have a little over five weeks to complete and pass the appropriations bills and avoid a government shutdown just before Thanksgiving.
Thankfully, after a period of little corporate or economic news, by the end of this week the focus will return to earnings, pushing Washington nonsense and international affairs into the background, assuming the war in the Middle East is contained to Israel’s borders.
Third quarter earnings are not likely to be the big problem. Fourth quarter and 2024 expectations may be. Retailers are rather pessimistic about Christmas. Already, Fedex# and UPS# are offering discounts to move goods to market quickly. Student loan repayments have begun. Despite Biden administration efforts to limit the impact, it still will be significant. Higher interest rates are crimping home purchases. Credit card rates exceed 20% for many. The 10-Treasury yield hit 4.9% Friday before receding. There is little question growth is slowing. Whether the U.S. falls into recession or not is still in doubt. But it is hard to imagine a major stock market rally until there is clarity of the economy’s path through the first part of 2024.
Normally, stocks are strong seasonally from late October through year end. Earnings reports and management comments will have a lot to do with defining direction through the end of the year. Clearly, there are pockets of strength. Technology and increased adoption of AI will have a strong influence. If the auto strikes and the actors strike can be resolved soon that would help. So would averting a government shutdown. But the real “conflict” is whether employment growth can offset any negative impact on spending from higher interest rates. It’s simply too early to tell. Americans still have some excess cash built up during the pandemic. Will that save Christmas? Retailers are cautious.
I will end with two comments on AI and obesity. AI isn’t something new. It has been evolving for decades. ChatGPT added an exclamation point. The big cloud providers have to add huge capacity because for AI to work, a computer must rapidly sift through massive amounts of data to provide solutions. As we move forward, AI will be imbedded in everything we do. It will also be misused, often for nefarious purposes. We can’t legislate that away. Indeed, AI tools will be needed to combat AI misuse.
As for obesity, a new class of drugs seems to be effective helping those who are obese to lose weight. Ultimately, insurance companies will pay for their use…. on those who are obese. Early estimates are that a million Americans might qualify, meaning insurance companies will pay a large share of the expense. Maybe that number ultimately turns out to be 2 million or 5 million. That’s out of 330 million Americans. The fact that a million or 5 million Americans no longer feel like eating potato chips isn’t going to mean the death of the potato chip industry. The notion that the obesity drug manufacturers will earn lots of money, suggesting the death of ice cream or potato chips because 1% or Americans are taking diet pills seems a bit extreme. I wish I could say everyone is going to eat plant-based foods and oily fish. Weren’t we all going to eat veggie burgers a couple of years ago? Beyond Meat is now $8 per share, a tiny percentage of what it was two years ago. These are going to be great drugs, hopefully. But let’s not get too far over our skis.
Today, Anika Sorenstam is 53. Jackson Browne is 75.
James M. Meyer, CFA 610-260-2220