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This Year’s Rebound for Stocks is Looking Less Rosy with Recent Data

Investors digest latest on manufacturing, services, private sector job growth.

The S&P 500 was able to post a slight increase in the third quarter, making the first nine months of the year the index’s best year-to-date performance since 1997. But what seems like a great start is fading fast as the fourth quarter gets underway.

During the third quarter the major stock indexes in the U.S. posted similar patterns. Concerns over global growth and the ongoing trade battle between the U.S. and China had the power to move markets on a seemingly daily basis, giving investors enough jitters to push stocks up and down over the past three months.

Yet, the S&P 500, along with the Dow Jones Industrial Average, managed to finish in the black, each with price gains of nearly 1.2%. The positive performance was noteworthy because U.S. government bonds also rallied as some investors opted for safe assets rather than riskier stocks. The positive, albeit, slight gains put the S&P 500 up by 18.7% for the year through September 30, and the Dow up by 15.4%. The Nasdaq, which slumped by nearly 0.1% in the third quarter, gained 20.6% for the first nine months of this year.

But with the third quarter now closed, stocks’ fortunes are off to a rough start in the first week of the fourth quarter. A disappointing manufacturing report released on the first day of October showed activity in the U.S. manufacturing sector fell to its lowest point since June of 2009. The September report on manufacturing from the Institute for Supply Management marked the second-straight month of contraction.

The release October 2 of the ADP National Employment Report showed the private sector adding 135,000 jobs in September. But signs of a slowdown were evident with the three-month average of job growth at 145,000, down from 214,000 in the same period a year ago.

“Businesses have credit available to them at low costs thanks to the low historic interest rates. They use that credit to buyback their own stock and meet payrolls. How long it can continue is largely up to the amount of money in the economy that can be used cheaply to support those activities,” Ben Bimson, BCJ’s chief investment officer, wrote in an October 1 BCJ Insights post.

The report added to the selling pressure weighing on stocks, leaving all three major indexes negative for the past 12 months. The S&P 500 has fallen 1.2%, while the blue-chip Dow Jones Industrial Average has declined by 3.1%, a period that includes the sharp selloff in the fourth quarter of 2018 and this year’s subsequent rebound. The Nasdaq has also fallen 2.7% during the same 12-month period through October 2.

And with the October 3 release of ISM’s report on the services sector showing the group’s non-manufacturing index hitting a three-year low, there are now concerns that weakness in manufacturing could be spreading to other areas of the economy. The ISM said those responding to its monthly survey “are mostly concerned about tariffs, labor resources and the direction of the economy.”

Indeed, keeping an eye on the labor market is a longer-term trend to measure to see if businesses are controlling costs. Any emerging signs of a pullback in hiring is worth noting as an indicator that a contraction in the economy could be on the horizon.

“The reason unemployment and layoffs are so critical to watch is that they have a much faster lead time to recession than things like yield curves. Every recession post-WWII has seen a trough in unemployment rates no more than 16 months before the next recession. Without that happening, we have not had a recession,” Ben explains.

For investors in the current environment, he says be patient and have a strategy in place. “The best thing that investors can do in this market is remain patient, alert to the underpinnings of the economy, resist the urge to make dramatic changes based on headline risk alone and make sure that you have a strategy that can be relied upon in the event of market breakdown.”

 

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Sources:

Institute for Supply Management. (2019, October 1). September 2019 Manufacturing ISM® Report On Business® [Press Release]. Retrieved from: https://www.instituteforsupplymanagement.org/ismreport/mfgrob.cfm?SSO=1

ADP National Employment Report. (2019, October 2). Private Sector Employment Increased by 135,000 Jobs in September [Press Release]. Retrieved from: https://www.adpemploymentreport.com/2019/September/NER/docs/ADP-NATIONAL-EMPLOYMENT-REPORT-September2019-Final-Press-Release.pdf

Institute for Supply Management. (2019, October 3). September 2019 Non-Manufacturing ISM® Report On Business® [Press Release]. Retrieved from: https://www.instituteforsupplymanagement.org/ISMReport/NonMfgROB.cfm?SSO=1                                                                                                                                                   

Sources for Market Data:

Dow Jones Industrial Average:

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=9%2F30%2F19&x=32&y=20

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=6%2F28%2F19&x=32&y=28

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=12%2F31%2F18&x=23&y=16

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F2%2F19&x=25&y=18

http://bigcharts.marketwatch.com/historical/default.asp?symb=DJIA&closeDate=10%2F02%2F18&x=21&y=29

S&P 500:

http://bigcharts.marketwatch.com/historical/default.asp?symb=spx&closeDate=9%2F30%2F19&x=27&y=18

http://bigcharts.marketwatch.com/historical/default.asp?symb=spx&closeDate=6%2F28%2F19&x=29&y=23

http://bigcharts.marketwatch.com/historical/default.asp?symb=spx&closeDate=12%2F31%2F18&x=23&y=21

http://bigcharts.marketwatch.com/historical/default.asp?symb=spx&closeDate=10%2F2%2F19&x=28&y=20

http://bigcharts.marketwatch.com/historical/default.asp?symb=spx&closeDate=10%2F02%2F18&x=36&y=18

Nasdaq:

http://bigcharts.marketwatch.com/historical/default.asp?symb=Nasdaq&closeDate=9%2F30%2F19&x=23&y=25

http://bigcharts.marketwatch.com/historical/default.asp?symb=nasdaq&closeDate=6%2F28%2F19&x=25&y=26

http://bigcharts.marketwatch.com/historical/default.asp?symb=Nasdaq&closeDate=12%2F31%2F18&x=27&y=24

http://bigcharts.marketwatch.com/historical/default.asp?symb=Nasdaq&closeDate=10%2F2%2F19&x=21&y=21

http://bigcharts.marketwatch.com/historical/default.asp?symb=Nasdaq&closeDate=10%2F02%2F18&x=23&y=28

Investment advisory services are offered through BCJ Capital Management, LLC., an SEC Registered Investment Adviser. Information presented is for educational purposes only. It should not be considered specific investment advice, does not take into consideration your specific situation, and does not intend to make an offer or solicitation for the sale or purchase of any securities or investment strategies. Investments involve risk and are not guaranteed, and past performance is no guarantee of future results. For specific tax advice on any strategy, consult with a qualified tax professional before implementing any strategy discussed herein. BCJ FG 19-150          

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