Stocks Exhibit Small Gains on Strong Economic Data; Bonds Get Smacked

Good morning,

The Dow (+0.1%), NASDAQ (+0.1%) and S&P 500 (+0.3%) edged out narrow gains for the week.  Meanwhile, taxable bonds got hammered, falling about 1.3%, while tax-free municipal bonds were relatively unchanged.  The 10-year Treasury yield jumped 0.23% to finish the week at 3.98%, just slightly below the 4% mark.

There was a flurry of strong US economic data reported last week, including the Institute of Supply Management (ISM) Manufacturing and Services data, as well as the much-anticipated September jobs report released on Friday.  The manufacturing sector of the US economy continues to limp along, but the larger services sector jumped in September, exhibiting its highest reading since February 2023.  Further, the forward-looking new orders component exhibited a sharp increase, but so did the prices component, which is a sign of inflationary pressure.  Then on Friday, a blockbuster jobs report was released, and showed that the US economy added 245,000 jobs in September, far exceeding economists’ estimates of 150,000.  The unemployment rate ticked down to 4.1%.

So, what does all this mean?  Well, it appears that the Fed may be engineering the incredible feat of a soft landing, as they have been able to lower inflation, but without destroying the job market.  Thus, the strength of the economic data could allow the Fed to slow its rate-cutting campaign, as the economy doesn’t appear to need that stimulus, and strong economic data could create inflationary pressure.  As a result, the bond market took it on the chin, as investors were hoping for more aggressive rate cuts by the Fed that may not occur because of the strong economic data.  In our professional opinion, it’s nice to see the markets reacting favorably to strong economic data, and less on hoping the Fed provides more stimulus.

Next on tap this week are two important inflation reports – Consumer Price Index (CPI) and Producer Price Index (PPI) - that will be released on Thursday and Friday.  These data will add fuel to whether or not the Fed cuts rates in November and the rest of this year.  We are also now heading into 3rd quarter corporate earnings season.  When you really get down to it, the value of a stock is based on its earnings, earnings growth, dividends, and dividend growth, and these are confirmed by their earning reports.  Most of the other headlines are “noise”, which creates emotions and volatility. Lastly, today marks the one-year anniversary of the barbarous attack on Israel.  My heart goes out to all the Israelis and Jewish families that have been impacted, as well as any innocent Palestinians who have been caught in the crossfire.  Let’s hope this day doesn’t mark more escalation of the Middle East conflict.

Have a great day and terrific week!

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