Weekly market wrap

Markets climb walls of worry: Four issues to consider as we head into the fourth quarter

Key Takeaways

• After a strong first three quarters of the year, with the S&P 500 up over 19%, stock markets began the fourth quarter on a volatile note. This was in large part because of elevated uncertainty around four key areas: The U.S. labor market, port strikes on the East Coast, tensions in the Middle East, and the looming U.S. presidential election.
• However, over the course of the week, the markets found some relief. The U.S. nonfarm-jobs report surprised nicely to the upside, while the East Coast port strike reached a tentative resolution.
• Although ongoing geopolitical and political uncertainties remain, the fundamentals of the economy also continue be solid. The Fed is poised to lower interest rates through 2025, inflation continues to gradually moderate, and economic growth, while cooling, remains positive.

U.S. labor market: Surprises to the upside

The labor-market data was perhaps the biggest upside surprise for the markets this past week. The U.S. nonfarm-jobs report for September indicated that not only did jobs added well-exceed expectations, coming in at 254,000 versus forecasts of 150,000, the unemployment rate also ticked lower, from 4.2% to 4.1%. Last month's total jobs added was also revised higher, from 142,000 to 159,000.¹

After two months of weaker-than-expected labor reports and downward revisions, this month's data was a welcome shift in tone for markets. In our view, the labor market is likely normalizing after a period of outsized strength in the post-pandemic period. There is more supply of labor, as new entrants come in and workers return to the workforce, and there is marginally less demand for labor, as job openings have trended lower all year.

Impact on Fed rate cuts?

Perhaps one of the biggest implications of this strong labor report is the potential impact on Federal Reserve rate cuts. After the labor-report data was released, markets immediately reacted, pushing Treasury bond yields sharply higher and pricing in rate cuts of 0.25% rather than 0.5% for either the November or December meeting this year.

In our view, a more measured pace of rate cuts is a reasonable approach for the Fed, particularly after it cut rates by an outsized 0.5% in September. Given that the jobs report also indicated that wage growth remains somewhat elevated at 4.0% year-over-year, the Fed likely remains on high alert for inflationary pressures reemerging as well.¹ Overall, we continue to see the Fed gradually bringing interest rates down toward the 3.0% - 3.5% range through next year, which should be supportive of both consumer and corporate spending.

East Coast port strikers reach tentative resolution

Earlier this week, on October 1, the International Longshoremen's association (ILA) – a 47,000-member union that represents workers in major Eastern U.S. and Gulf Coast ports – went on strike for higher pay and protections. This strike impacted 36 ports across the East Coast, with estimates pointing to daily damage of $1 billion - $5 billion in lost activity (although still a small fraction of the $29 trillion U.S. economy). However, forecasts also showed that if the strike could be resolved within two weeks, the longer-term economic impacts would be negligible.

The good news: Strike has resolved after three days

In addition to the solid jobs report, more welcome news arrived this week in the announcement of a tentative resolution to the ongoing East Coast port strike. The agreement between dock workers and port operators calls for a wage hike of 62% over six years, raising average wages from $39 per hour to about $63 per hour over the life of the contract.

In our view, similar to the rise in wage gains in the jobs report, the resolution of this port strike has the potential to be marginally inflationary, as labor costs will move higher over time. However, if the strike had continued, the potential impact on inflation and growth would likely have been more costly, as we had seen in the pandemic era when ports were closed and supply shortages were rampant.

We will also be watching to see the impact to the labor market from the disruption from the strike, alongside the devastation from Hurricane Helene. We could see a temporary move higher in jobless claims and unemployment due to both these events, but we would expect both to return to normal levels over time.

Geopolitical tensions remain an overhang

Geopolitical tensions also escalated in the Middle East early this week, as Israel faced an Iranian missile strike and deliberated retaliation. From a market perspective, the immediate response to the escalation was a rise in oil and commodity prices, as well as a rise in safe-haven assets, such as gold and Treasury bonds, and a sharp move higher in the VIX volatility index.

However, over the past week, the move in safe-haven assets has largely reversed, with Treasury bonds, gold, and the VIX index all moving back lower. Oil prices, however, continue to remain elevated, as perhaps the biggest market impact from escalation in the Middle East would come from disruptions in oil and energy supply. WTI oil prices, for example, are up over 10% this past week alone.¹

In our view, the risk of major escalation in the Middle East remains a tail risk event for now. From a market perspective, such an escalation could spark risk-off sentiment and drive the supply of oil and energy lower and prices even higher. However, given that the U.S. and other economies have been able to increase oil and energy production in recent years, especially in the post-pandemic era, some of the risk around supply disruption has been mitigated. Longer-term, we would expect global demand for oil and energy to have a larger influence on pricing than supply.

U.S. Elections – about one month to go

Finally, the U.S. presidential election remains an ongoing area of focus, with less than five weeks remaining until the November 5 election day. While there was no notable news flow on the election this past week – aside from the vice-presidential debate, which seemed relatively inconclusive – the presidential and Congressional races remain tight, with narrow margins of victory likely across key states.

History does tell us that market volatility tends to increase in the weeks ahead of election day. Stock markets typically pull back ahead of elections, given the uncertainty and in some cases rising anxiety around election outcomes. However, in the weeks following Election Day, the stock market tends to recover, regardless of which party is in the White House. This is perhaps because some uncertainty is lifted once elections are behind us, and markets can again focus on the opportunities ahead.

Overall, lean into market volatility or pullbacks as an opportunity

Overall, equity markets faced several walls of worry as we kicked off the fourth quarter. These included uncertainty around the U.S. labor market, a potential East Coast port strike, escalation of tensions in the Middle East, and the looming U.S. presidential elections.

However, with a strong jobs report and tentative resolution to the East Coast port strike, markets have already begun climbing some of these walls of worry.

In our view, after a strong rally in the first three quarters of the year, and with uncertainty around politics and geopolitics remaining, we could still see bouts of volatility in the weeks ahead. Nonetheless, we would lean into any pullbacks or volatility as an opportunity to diversify, rebalance, and add quality investments at better prices.

We believe the fundamentals of the bull-market expansion remain intact: The Fed is on a path to ease interest rates, inflation continues to gradually moderate, and the U.S. economy looks poised for a "soft landing" (no recession). In addition, earnings growth is on pace for double digits this year, and perhaps next year as well.¹ We see both equity and bond markets remaining well supported in this backdrop, especially as markets continue to climb past near-term uncertainties.

Mona Mahajan
Investment Strategist

^{Source: 1. Bloomberg.}

Weekly market stats

^{Source: FactSet, 10/4/2024. Bonds represented by the iShares Core U.S. Aggregate Bond ETF. Past performance does not guarantee future results. *4-day performance ending on Thursday.}

The week ahead

Important economic releases this week include CPI inflation data and a read on consumer sentiment.

Review last week's weekly market update.