@theMarket: A Week to Remember

It was a week to remember in financial markets. Hurricane Helene, the longshoreman strike, Iran's ballistic missile attack against Israel, American drones shot down by Houthi rebels, and a massive gain in U.S. jobs — welcome to October.

 

All the above happened in just the first week of the month. The stock market has hung in there through all of it. However, the events of the week have given heartburn to investors and traders alike.

 

The massive flooding and rising death toll in Florida and North Carolina were tragic but also negative for overall future growth and employment. The price tag is estimated to be above $34 billion. Insurance stocks did not suffer simply because they no longer cover flood damages in much of those areas. The price tag will need to be absorbed by the nation's taxpayers.

 

The Longshoreman's strike encompasses a shutdown of half the ports in the U.S. from Maine to Texas. Harold Daggett, who leads the International Longshoremen's Association, was insisting on a 77 percent pay raise but settled for less and the strike was at least postponed until early next year. Estimates put the price tag of disrupted trade for the country at as much as $5 billion daily, so we dodged that bullet for now.

 

The geopolitical events that find Israel in an undeclared shooting war with the Houthis, Hamas, Hezbollah, and possibly Iran have also riled markets and sent the dollar and yields higher. It has also supported precious metals and the price of oil.

 

Market participants fear that if Israel were to respond to Iran's latest missile attack, by damaging Iran's energy production, oil prices could spike higher. If so, that would prove inflationary.

 

Those fears may be overblown. Iran currently supplies about 3 percent of the world's oil production. Global oil demand has been slowing as it is. This week, the Saudi oil minister warned Iraq and Kazakhstan that if they ignore their OPEC-directed output cuts, prices could fall to $50 a barrel. next year.

 

In this environment, Saudi Arabia could easily make up for any lost production brought on by an Iran/Israel conflict. Oil could go higher but there is a lot of technical resistance around the $77 a barrel mark.

 

The non-farm payroll for September crushed expectations. The U.S. economy added over 250,000 jobs while the unemployment rate dipped to 4.1 percent. That was more than the 150,000 job gains expected. Wage growth also increased by 0.4 percent. This followed a good report on the ISM services sector. Where does that leave the markets? Disappointed, as far as future rates cut by the Fed.

 

Stronger employment data means less need for sizable rate cuts. If you combine that with the possibility of higher energy prices and therefore more inflation, the bull's case for more rather than less loosening by the Fed becomes that much weaker.  

 

As you know by now, September through October are historically seasonably tough months for the markets. I was expecting September to have a more negative impact on the market. I was wrong. My mistake was in not accounting for presidential election years, which somewhat dilutes seasonal factors in those years.

 

Nonetheless, October has historically been 34 percent more volatile than the average of the remaining 11 months of the year. It has certainly started that way. Although many traders are expecting a decline in the next few weeks, there are plenty of bullish factors that are underpinning stocks.

 

Friday's jobs report is just one example. Next week, on Oct. 10, September's Consumer Price Index data will be reported. I believe that data will show cooler inflation. If so, lower inflation and declining unemployment are not a bad combination.

 

Market breath (advancers versus decliners) is still near the highs. Investor sentiment is about even, neither too bearish nor bullish. About 78 percent of stocks in the S&P 500 Index remain above their 200 Day Moving Average. If we do pull back in the days ahead, I see at most a mild sell-off (barring a full-scale shooting war in the Middle East). I would be a buyer of any dips.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.