The strong labor market ‘broke’ Wall’s downward streak

With a “sprint” in the latter part of the session, the main indices of Wall Street erased the losses recorded during most of the day and, except for the technology Nasdaq, entered the traditionally negative September for the markets on the right, despite the fears that investors the prospect of a continuation of the cycle of monetary tightening by the US Federal Reserve.

An important role in even timid investment optimism was played by the better-than-expected data on the US labor market at the end of August that were announced earlier.

The Dow and S&P 500 thus snapped their four-session losing streak. More specifically, the industrial one Dow Jones gained 145.99 points, or 0.46%, to 31,656.42 points, with the broadest S&P 500 to gain 11.85 points or 0.30%, at 3,966.85, while the technological Nasdaq lost 31.08 points, or 0.26%, to 11,785.13.

Since World War II, the S&P 500 has averaged a 0.56% loss in September. In contrast, October, November and December are historically positive and usually profitable months.

Data on new jobless claims, which fell again in late August to June levels, also show “that the labor market is still relatively strong, despite the fact that it has stopped strengthening further,” said Chris Zaccarelli, head of the investment industry at the Independent Advisor Alliance.

However, the indexes remain on a losing track for the week, while on Wednesday they closed August with losses. In particular, last month the Dow lost 4.1%, the S&P 500 4.2% and the Nasdaq 4.6%.

“The June lows are likely to rebound in the coming weeks as investors see the true scale of the Fed’s tightening,” said John Lynch, chief investment officer at Comerica Wealth Management. “Inflation and recession are typically accompanied by negative market multiples, and markets will need to adjust valuations as interest rates rise.

“A successful test of avoiding the June lows could also prove important as a double-bottom pattern could allay fears of further price volatility in the months ahead,” Lynch added “We think average analyst estimates for earnings in 2023 are too high and technical support will be needed as forecasts are disproved,” he concluded.

Investors have underestimated the willingness of central banks to continue tightening monetary policy, as evidenced by the market sell-off that began on Friday, according to UBS.

“We maintain our view that the Fed will raise interest rates by another 100 basis points by the end of the year, with risks of an even bigger increase if inflation does not slow as forecast,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.

“With interest rates likely to remain higher for longer, our base case scenario includes further volatility, earnings downgrades and higher-than-expected default rates over the next year. In equities, we recommend a selective approach and tilt exposure towards value, quality income and defensive stocks”.

The index’s high intra-session volatility came at a time when the yield on 2-year US Treasuries is hitting a 15-year high, specifically since November 2007, at 3.516%.

Shares in Nvidia stood out among the losers, losing 7.7%, after the semiconductor maker said the US government had restricted sales of some products it sells to China, among others.

A hallmark of the past five sessions, however, has been the shift by retail investors to Apple stock, which is seen as a safe haven after the Fed chairman warned of coming economic pain due to the fight against inflation.

In total, retail investors over five days bought more than $340 million worth of the company’s shares.

Among the 30 Dow stocks, 21 moved with a positive sign and 8 with a negative sign. The gains were led by those of Johnson & Johnson, Amgen, Merck, while the losses of Boeing, Dow Inc. and Salesforce.

New unemployment benefits hit two-plus-month low

New claims for unemployment benefits in the US fell to their lowest level since June at the end of August, confirming the resilience of the US labor market to the shocks that the inflation rally continues to cause.

Specifically, initial jobless claims fell by 5,000 for the week ended Aug. 27, sliding to a nine-week low of 232,000. The previous week’s reading was revised lower to 237,000 from 242,000 initially reported.

It is noted that the average estimate of analysts in a Wall Street Journal poll placed applications at 245,000.

Initial claims had fallen to a low of 166,000 at the end of March, the second-lowest in the survey’s history, before starting to rise over the summer.

The continued resilience of the labor market, however, is fueling fears of a more aggressive stance from the Federal Reserve as part of its effort to rein in inflation. The US central bank has already raised interest rates by a total of 225 basis points since March.

Investors are also waiting for the data that the US government will announce tomorrow for an overall picture of the labor market. Analysts expect government data to show an increase of 300,000 jobs in August, after July’s jump of 528,000 positions, according to a Reuters poll.

Manufacturing PMI at lowest level since July 2020

U.S. manufacturing activity also slowed further in August as the world’s largest economy continues to grapple with the shocks of rallying inflation and aggressive rate hikes by the Federal Reserve.

In particular, the manufacturing PMI index fell to 51.5 points in August, slightly better than the initial reading of 51.3 points, but below the reading of 52.2 points in July, S&P Global said on Thursday.

This is the lowest reading since July 2020.

“U.S. factory output fell for a second month in a row in August, with demand for goods having now fallen for three straight months amid the continued impact of rallying inflation, supply disruptions, rising interest rates and increased economic uncertainty on the economic outlook,” commented Chris Williamson, chief economist at S&P Global Market Intelligence.