Ghosts and shadows

A Wall Street adage declares that October is where bear markets go to die. But novelist Joy Fielding’s view that the month is “full of ghosts and shadows” might prove more apt for investors.

After suffering through three consecutive quarters of declines, both the stock and bond markets rallied sharply over the first two trading days of the month on renewed optimism the Federal Reserve would pivot toward more dovish monetary policy in the weeks ahead. In the ensuing days, however, those hopes have been dashed by upward pressure on energy prices following the largest OPEC+ production cut since the start of the pandemic and a consistent drumbeat of hawkish comments by Fed officials.  

That placed an even greater importance on this morning’s already highly anticipated nonfarm payroll report. The bullish hope was that a softer-than-expected nonfarm payroll report—alongside a surprising increase in job openings (JOLTS) and a contractionary reading in the employment component of the ISM manufacturing survey—would confirm that labor market conditions finally are loosening in response to tighter policy.

Instead, the economy added 263,000 jobs in September, beating consensus expectations for a gain of 255,000, with an upward revision of the prior two months of 11,000. The numbers are even more remarkable as September has fallen short of expectations 76% of the time over the last 25 years—the most of any calendar month. The unemployment rate fell from 3.7% to 3.5%, driven by another discouraging data point: a decline in the labor force participation rate from 62.4% to 62.3%. Wage data also offered no reprieve, as average hourly earnings grew 0.3%, the same pace as last month and up 5% year-over-year. These numbers are simply too elevated for a Fed desperate to get core inflation down to its 2% target. In short, the report paints a picture of a labor market that remains historically tight.

In recent days, several Fed officials have stated the bar is high for slowing its aggressive rate hike cycle, and today’s news is unlikely to deter them. The fed funds futures market is coming to the same conclusion, with a 75-basis point hike in November now all but priced in, and both equities and bonds sold off in response. The markets will now turn their attention to next week’s CPI report, likely the most significant data point before the November FOMC meeting.

For our part, we remain cautious as the outlook for economic and earnings growth deteriorates. With bullish hopes for a Fed pivot once again frustrated and inflation stubbornly high, perhaps the bear will survive this month, leaving investors to deal with ghosts instead.