October 2023
WHAT YOU NEED TO KNOW
The following facts and statistics describe the situation from September 1st to October 4th, 2023
The S&P 500 is down 5 percent for the month of September and is up 9.5 percent year to date.
The S&P 500 P/E ratio currently is at 23.46 (the historical average is 16).
The NASDAQ decreased by 7 percent and is up 24.7 percent year to date.
The NASDAQ is composed of higher beta, growth stocks.
Many of these stocks currently are trading at a premium to major indices.
The Dow Jones Industrial Average was down 5.3 for the month of September and is flat for the year
RECENT STATISTICS AND ECONOMIC DATA THAT AFFECT INVESTMENT DECISIONS
The following statistics and data are important factors to consider when making investment decisions:
The Personal Consumption Expenditures (PCE) Price Index (an index favored by the Federal Reserve) is 3.5 percent in August -- an increase of .1 percentage points from July.
According to ADP Employment 89,000 jobs were added in September with an annual pay increase of 5.9 percent. Most of the job gains were in leisure and hospitality. Nela Richardson, Chief Economist at ADP says, “We are seeing a steepening decline in jobs this month. Additionally, we are seeing a steady decline in wages in the past 12 months.”
Job openings increased by 7 percent from 8.9 in July to 9.6 million in August. There is a noticeable increase in demand for employees across various industries and employers are facing challenges in filling all available positions. Before the pandemic (from 2013 to 2019), the monthly average of job openings was around 5.514 million. From the beginning of the pandemic up to the current time, average monthly job openings have risen significantly to approximately 9.465 million. These data suggest that the job market has experienced a notable shift with job openings increasing substantially during the pandemic compared to the pre-pandemic period. This could indicate ongoing economic recovery or changes in the way businesses operate because of the pandemic.
The U.S. unemployment rate is 3.8 percent, an increase of .3 percentage points from July’s 3.5 percent. The labor market remains strong, but showing some slight cracks.
The Employment Cost Index in June shows a 4.5 percent year-over-year increase in wages. This is the first time that wages have increased faster than inflation, showing real average earnings are up 1.3 percent.
In August, the Consumer Price Index for All Urban Consumers increased 0.6 percent, seasonally adjusted, and rose 3.7 percent over the last 12 months, not seasonally adjusted.
Core CPI (excluding Food and Energy) is up 4.3 percent from the previous 12 months.
Month-over-month August retail sales increased by .6 percentage points when compared to July.
The yield curve between the 2-year and 10-year Treasury Bonds currently is -.43 and currently is in an upward trend. The last 6 recessions have happened after the 2-year and 10-year yield curve reversed and turned positive.
The Federal Reserve’s Balance Sheet currently shows $8.002 trillion in assets. The Fed’s Balance sheet was at its highest in April, 2022 at $8.965 trillion in assets. The Federal Reserve has removed 9.6 percent in liquidity, but still remains 91 percent elevated above its pre-pandemic assets.
QUESTION FOR CONSIDERATION
With all we know and all we don’t, is the reward of investing in stocks worth the risks that currently exist in the economy?
THE BOTTOM LINE
Is the risk of this investment worth the potential reward? That is the question to ask when making any investment decision. When making investment decisions in the current market there are many risks – in addition to individual business risks – that must be assessed. There are known risks and risks that remain unknown until they become apparent. Several currently identified situations that need to be considered when assessing investment risk in today’s financial environment are discussed below.
September historically has been a volatile month: the average monthly return of the S&P 500 from 1945 to 2022 has been a decline of 0.73 percent.
Here are the S&P performance statistics for the past three Septembers.
September 2021: A decline of 4.76 percent.
September 2022: A decline of 9.34 percent.
September 2023: A decline of 5 percent.
Currently, the United Auto Workers (UAW) union is striking the three biggest auto makers in the US: Ford, General Motors, and Stellantis. There are 25,200 employees, or roughly 17% of UAW members covered by the expired contracts with the Detroit automakers, on strike. What happens to the supply of new cars if this strike continues or intensifies? Additionally, if there is a short supply of new cars due to the strike, we can expect to see the price of used cars rise with increased demand. The UAW is pushing for a roughly 40% general wage increase for its members over the length of a four-year contract, pointing to automakers' recent profits. That would bode well for the employees covered under the contract, but who would absorb the cost of that increase in labor? The consumer!
Another cause for concern when assessing risk is the rising price of oil and various commodities. For instance, crude oil is up 11.8 percent in the month of September and 15.2 percent from one year ago. The rising gas prices that follow an increase in crude oil prices means that consumers will pay more for gasoline, and there is a much more concerning problem with rising gas prices: transportation costs will increase for every item that must reach retail shelves and/or must be shipped directly to consumers.
An additional concern is the fact that Treasury yields are rising at an alarming rate. The current 10-year Treasury bond rate of 4.7 percent yield is a 13 percent increase in the month of September. This is good for bond investors, but it raises the issue of the need for many companies – including banks – that will need to restructure their debt in the near future. Many companies issued debt when interest rates were very low, and now the cost of restructuring that debt and the cost of debt servicing will be substantially higher and will cut into profits, shareholder equity, and potentially even dividends. Close attention must be paid to the amount of debt companies are carrying.
Finally, student loan repayments are resuming this month. There are approximately 43 million borrowers who are approximately $1.6 trillion in debt to the federal government for their schooling. The average loan repayment is estimated to be between $200 and $400 a month. At the low end of the estimates, $200 a month with 43 million borrowers would remove $8.6 billion in discretionary spending from the nation’s economy each month.
These are just a few of the risks that currently are affecting the U.S. economy. Given these risks, I do not see the inflation rate decreasing as fast as we wish; in fact, I do not see any reduction in this rate at all in the near-term future.
As far as the stock market is concerned, there are some buying opportunities caused by the mispricing of the stock market – but it is necessary to look closely at any opportunities, to consider your overall investment strategy, and to do all necessary research. Companies currently worth consideration should have significant free cash flow and a low amount of debt; they should be trading below their historic price-to-earnings (P/E) ratio or their historic price-to-sales ratio; and should have ample sufficient demand even in a recession.
The 10-year treasury bond is trading at a level not seen since July 2007, and many fixed income instruments such as money markets and both treasury and corporate bonds have a real rate of return meaning that their yield is above the rate of inflation. Depending on the investor, time frame, and the investment, fixed income options should certainly be considered at the current yields.
Don’t forget that having a diversified portfolio allocation is always advisable—and that is The Long and Short of It!