Overall, major U.S. stock indexes showed resilience amid a volatile week of trading. Hotter-than-expected labor market data catalyzed a positive market reaction late in the week.
Shockingly Strong Payrolls
Major U.S. stock indexes traded lower for most of last week, with market volatility on display. After the early week trading action, it was a waiting game heading into Friday’s September payroll data.
The Dow Jones estimates were for a paltry 170,000 in new jobs added. However, September saw 336,000 jobs added – way above consensus expectations.
Friday was an attention-grabbing day in the U.S. financial markets, leaving many market veterans somewhat befuddled.
Recent conventional wisdom would dictate the reaction to the jobs number being something to the effect of: “Oh no! 336,000 jobs? The economy is running too hot. The Federal Reserve will have to hike rates further, so let’s sell stocks.” And initially (very briefly), that was the reaction.
Upon the data’s release on Friday at 8:30 a.m. (ahead of the cash stock market open at 9:30 a.m.), Emini S&P 500 futures markets turned sharply lower. But hold the phone (and this is the attention-grabbing part!), the S&P 500 started to turn upwards sharply as the morning wore on and the cash stock market opened.
Buyers continued shopping throughout the day, sending the S&P 500 sharply higher, in contrast to expectations.
But why? And does it matter?
If you ask veteran market participants, they will tell you there is no singular reason why Friday featured a reversal to the upside in the major U.S. stock indexes, but here are some factors that played into the day.
Overly-bearish sentiment: Sometimes, when investor pessimism reaches extremes, market reversals can occur. According to the CNN Fear & Greed Index, we can see that the index indicated extreme fear (below 25) last week and ultimately finished the week at 29.
Algorithms & AI: Unemotional AI and algorithms don’t care about fear – they never get scared! They often will find opportunities to take the other side of a trade that has been oversold or overbought; sometimes, they will accelerate on an “event,” like the jobs number last Friday, setting in motion a chain of events that sends indexes higher.
Under The Hood of the Payrolls Data: 336,000 jobs was a shocker to the upside. However, looking more deeply at the September payroll data, one could ascertain there could be a discrepancy between jobs added and employment.
Fed Market Expectations
As of last week’s market close, there is a high probability of the Fed leaving rates unchanged at the November meeting.
However, it is worth noting that the probability of a 25-basis-point hike sits at 27.1% as of last Friday’s market close versus an 18.3% chance a week prior.
Lower Prices at the Pump?
Notice lower gasoline prices lately? Lower crude oil prices may be trickling down to the pumps in the coming days.
After a hefty rise in crude oil for the summer and into September, prices started dropping precipitously last week in futures markets, with the front month November contract declining by 8.81% to settle near $82.79 for the week.
A potential economic slowdown and a significant build in gasoline inventories last week were cited as contributing factors to the price decline.
However, the Israel-Gaza conflict had crude oil trading higher in the futures markets on Sunday night.
The average price for regular unleaded gasoline was $3.722 as of October 7th versus $3.803 a month ago, according to data from AAA. On Monday morning, the average price was down to $3.704.
We will see if any impacts arise this week.
Narratives Change, Long-Term Investors Remain Steadfast
So, did we see a medium-term narrative shift in U.S. equities last week? What will the Fed do next? What about interest rates and inflation?
For clues this week, attention turns to Consumer Price Index (CPI) inflation data on Thursday. The most recent CPI report for August showed a 0.6% month-over-month increase, with higher energy prices contributing to much of the advance. Crude oil has declined thus far in October, but the upcoming CPI data is for September.
Moral of the story? It was a heck of a Friday last week. For long-term investors, we like to be in a position of strength and discipline by creating and adhering to a long-term plan for success versus reacting to short-term narrative shifts and outlooks.
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