A big Friday reversal helped stocks to close higher on the week as macroeconomic policy and geopolitical risks dominated headlines ahead of earnings season.
The weak jobs report scared investors at the open. The DJIA was down 250 points at the lows.
- With a rate hike off the table for at least a few months, but domestic growth still percolating, a goldilocks mentality took hold and bargain hunters emerged.
- A falling dollar and oil’s rally added fuel to the fire.
- The market rallied 450 points from the morning low to close up 1% on the week and exit correction territory.
Middle East Mess
Grandstanding at the U.N. and the President’s closed door meeting with a former, but now rising, superpower highlighted the biggest risk to global markets, economy and humanitarian efforts.
- The issue is now front and center for the 2016 election with implications that go well beyond the region and into everything from EU policy to the price of oil.
Thoughts and Prayers
After another mass shooting, we take a moment to remember those lost at Umpqua.
Weakness in the non-farm payrolls report came as a surprise to investors and has added to the uncertainty surrounding the next move by the Federal Reserve.
The Big Miss: According to the September jobs report from the Commerce Department, monthly non-farm payrolls grew by just +142K, notably lower than the consensus estimate of +206K.
- To add insult to injury, the August report was revised down from +173K to +136K. Historically, August payrolls have seen significant upward revisions.
Fed Lens: Going into the report, the Fed Funds curve had been pricing in a 44% probability of a rate hike in December.
- After the disappointing report, investors piled into treasuries on the indication that slowing growth abroad is impacting the labor market in the U.S.
- Hence, the Fed made the right call to hold in September as they wait for more information.
- The probability of a December hike is now just 29%.
Our Take: We believe that the latest jobs report is unlikely to produce panic at the Fed.
- The 3-month average in the table below shows that the pace of recovery has been surprisingly resilient in the face of the occasional weak spot.
- In addition, based on Yellen’ last public appearance, the Fed seems to have reached the consensus that the U.S. economy is strong enough to weather pressures abroad that may yet prove transitory.
Looking Ahead to Next Week
For Your Peru-sal: Annual meetings for the International Monetary Fund and the World Bank Group will be held in Lima at end of next week.
- The IMF will release its latest World Economic Outlook including an updated 2015 global GDP growth forecast, the most recent of which was cut to 3.3% in July.
Storm Brewing: Effects from category 4 Hurricane Joaquin could impact several major cities along the East coast starting as early as Sunday morning.
- FDNY has additional emergency personnel already on hand, while rumors are speculating that the Eagles vs. Redskins game in Washington D.C. could be postponed.
And The Winner Is: The Nobel Peace Prize will be awarded Friday with German Chancellor Angela Merkel, Pope Francis and John Kerry among the nominees.
- Merkel for opening Germany’s doors to thousands of refugees, Kerry for inking a contested Iran Nuclear Deal and the Pope for being a general advocate of peace and the poor.
STRATEGIC Asset Allocation
Risk on, Sort of: Equities outperformed this week, led by Emerging Markets. Meanwhile, Developed Int’l stocks posted a nice turnaround to finish with modest losses. These two asset classes have been amongst the worst performers in ‘15.
- Interestingly, Small Cap stocks (also at the bottom of the list this year) failed to participate in the rally as financials in the index struggled. Historically, Small Cap equities (particularly Value) have been an attractive long-term holding, and an opportunity may be emerging for adding to the asset class.
Dollar Daze: Another tough week for Health Care, but the biggest laggard was the consumer Staples sector. Blame it on…
- McCormick & Co. (MKC) reported a light quarter as currency issues masked sales growth. Full year sales guidance was unchanged, but net income will be on the low end of ests.
- Costco Wholesale Co. (COST) reported a top line beat, but showed a quarterly sales drop in Canada (-10%) and other international markets (-7%). Ex-gasoline price deflation and currency issues, sales grew 6% for the quarter.
STRATEGIC Equity Income
Giving It Back: At last a little relief in Materials sector this week but not in the energy sector. In other strategy news…
- Nordstrom Inc. (JWN) finally sold its credit card portfolio for $2.2 billion. The company quickly announced it will pass it on to investors. The company will pay a $4.85 per share special dividend and buyback $1 billion of its stock.
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