Daily market snapshot

• Stocks close modestly higher – Stock markets closed modestly higher on Tuesday, partially reversing Monday's sell-off. Geopolitical tensions remained in focus, as investors await the response from Israel after an Iranian missile strike. Commodity prices reflected this uncertainty, as WTI crude oil prices continued to move higher, up over 4% in the last two days*. The VIX volatility index, also known as the Wall Street fear gauge, also remained elevated, up over 10% this week, although still relatively contained around 19*. Meanwhile, bond yields stabilized after falling on Monday, as news of the Middle Eastern tensions sparked a flight to safe-haven assets. The 10-year Treasury yield remains around 3.78%, still well below its April high of 4.7%*, reflecting both the start of the Fed rate-cutting cycle and softer inflation and economic growth trends.
   
• Geopolitical tensions take center stage – Geopolitical tensions escalated in the Middle East after Iran fired about 200 ballistic missiles at Israel, which were largely intercepted. Israel has vowed to retaliate, and the flaring tensions have increased the odds of further escalation in the Middle East. Markets have started to reflect the growing risk, as oil prices and commodity prices have moved higher. In addition, immediate reactions included a rise in safe-haven assets, such as gold prices and Treasury yields, and a move higher in the VIX volatility index*. However, since Monday, many of these trades have reversed, as news broke that casualties and damage had been contained. We believe that geopolitics remains a tail risk, and the key risk would be a major escalation in the Middle East, which could drive supply of oil and energy lower and prices 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.
   
• U.S. nonfarm-jobs report out on Friday – Investor attention will shift to the U.S. jobs report for the month of September, which is out on Friday. In the last two months, the jobs report has surprised to the downside, with outsized negative revisions, sparking market volatility. This month's report, however, is expected to show some signs of stabilization. The total jobs added are forecast to be a modest 150,000, only slightly higher than last month's 142,000, but below this year's average of 200,000 jobs added*. The unemployment rate is expected to remain steady at 4.2%, while average hourly earnings are expected to tick lower from 0.4% to 0.3% month-over-month*. In our view, the labor market in the U.S. has clearly cooled, but this still appears to be a normalization after outsized strength in the post-pandemic period. While the unemployment rate has moved higher from its lows last year of 3.4%, it remains well below long-term average unemployment rates in the U.S. of 5.5% - 6.0%*. In addition, the increase in unemployment has been driven largely by new entrants coming into the workforce, rather than large increases in job cuts or layoffs. We believe that this cooling but still steady labor market remains supportive of household consumption broadly.

Mona Mahajan
Investment Strategist

^{Source: *FactSet}

• Stocks kick off October on a cautious note - Major indexes finished broadly lower on the first trading day of the month following a strong September. Investors are closely watching the developments in the Middle East and at U.S. ports amidst a historic strike, while digesting Fed Chair Powell's commentary yesterday about a gradual approach to rate cuts. Headlines that Iran fired missiles at Israel following an advance of armed forces into Lebanon triggered a 3% spike in oil prices, though prices remain near a two-year low. The energy sector led the gains, while technology shares lagged*. Elsewhere, European markets also declined, and the U.S. dollar strengthened after inflation in the region slowed below the Europe Central Bank's (ECB) 2% target for the first time since 2021*. This increased hopes that the bank may cut interest rates again in October. In China, stocks are closed for a holiday, but optimism in the region persists after last week's wide-ranging stimulus announcements triggered the biggest outperformance in Chinese equities relative to their emerging-market peers in 25 years*.
   
• Gauging disruption potential from port strike - A historic strike is underway as 45,000 dockworkers operating 36 East Coast and Gulf Coast ports went on strike overnight*. This is the first such strike since 1977 and has the potential to affect as much as half of all U.S. trade volumes, triggering an economic disruption and putting upward pressure on prices for goods, if it is prolonged. The situation is fluid, but despite the potential negative short-term implications, we think that the strike could be less impactful than the 2021 post-pandemic port backup and is unlikely to trigger a major economic disruption. Container traffic has risen earlier this year than in the past, as companies have likely stockpiled in anticipation of strikes (the contract talks have been in a stalemate since June). Also, West Coast ports are more important than East Coast ports for holiday goods, and importers can redirect the flow of goods, though at a higher cost. Lastly, if an agreement is not reached, the Biden administration could intervene by imposing an 80-day cooling-off period, forcing workers to return while negotiations continue.
   
• Focus turns to jobs, as the third quarter wraps up with big gains - Equity markets turned the page on another strong quarter, the fourth in a row, with the S&P 500 gaining 5.5%, now up about 20% for the year*. While the shift in Fed policy has helped lift stocks broadly, it is a mix of defensive and cyclical sectors that led the charge (real estate, utilities, financials, industrials), rather than the usual suspects (tech, communication services and consumer discretionary). Showcasing the broadening in leadership, the Nasdaq trailed the equal-weighted S&P 500 for the quarter, while value-style investments, along with small- and mid-cap companies, outperformed. With sizable gains already in the books, attention now turns to the labor market, which has been a source of volatility over the past two months. Data on job openings will be released today, followed by private payrolls tomorrow and the September jobs report on Friday. Expectations are for the U.S. economy to add 150,000 jobs, a slight acceleration from the previous month, with the rate of unemployment holding steady at 4.2%*. In our view, the job market is clearly cooling, but that is, so far, driven by more people joining the work force rather than companies increasing the pace of layoffs. We think the combination of a slowing but still growing economy and the proactive Fed rate cuts to remove restriction can help sustain the economic expansion and bull market, with episodes of volatility along the way.

Angelo Kourkafas, CFA
Investment Strategy

^{Source: *FactSet}

• Stocks edge higher to start the week: After treading water for much of the day, U.S. equities edged out a small gain to kick off the week. Escalating tensions in the Middle East over the weekend may have added a pinch of caution, as did some commentary in a speech from Fed Chair Powell, but the mood across markets continues to be broadly optimistic, as demonstrated by last week's gain that sent the S&P 500 to record highs amid a three-week winning streak. Sector leadership came mostly from defensive sectors like health care and utilities, but cyclicals held up as well on the day. Oil prices closed a touch lower, as geopolitical risks are being offset by shifting production expectations. Interest rates were slightly higher, with the curve flattening a bit, as short-term rates were up more than long-term rates. This may be reflecting some adjustments to the size or pace of further rate cuts from the Fed in the coming months, underscored by Chair Powell's comments that the Fed is not in a hurry to ease policy if indeed the economy remains strong. It also appears that an East Coast port strike could begin tomorrow, which would cause some disruption to the incoming supply of goods, presenting possible implications for consumer prices. We don't think this would be a dramatic impact immediately, but an extended strike and port stoppage could create renewed inflation concerns, particularly heading into the holiday shopping season. We suspect this would join election uncertainties on the list of near-term catalysts for market volatility.*
   
• Performance check as the third quarter comes to an end: Today brought the end of what was a very strong third quarter across the financial markets. Both equities and bonds logged solid gains, with the former benefiting from resilient economic and corporate earnings growth alongside the beginning of a Fed easing cycle, while the latter received a boost from falling interest rates. We'd characterize the quarter overall as one in which the bull market experienced noticeable broadening, with leadership rotating from growth and technology stocks toward a wider range of asset classes, to the benefit of diversified portfolios. Cyclical and international investments outperformed, with U.S. small- and mid-cap stocks gaining nearly 10% over the last three months, while international developed-market equities and emerging-market stocks posted similar gains (the majority of the emerging-market return came just in the last week, as Chinese stocks surged on news of government stimulus). U.S. large-caps delivered a solid 5% return during the quarter, but this was driven by a rotation toward value, cyclical and defensive areas, with tech and growth investments lagging. The utilities, real estate, financial services, industrials and materials sectors are all up double-digits over the last three months, while the tech and communication services sectors are roughly flat.**
   
• Jobs in focus this week: The calendar is backloaded this week, with markets likely to focus keenly on fresh employment data. Before then we'll get additional commentary from Fed officials at various speaking engagements over the next few days, along with several manufacturing reports. The last batch of weak manufacturing data added to August's and September's bouts of volatility, driven by fears of an approaching recession. Those fears were soothed by the recent announcement from the Fed, so the combination of Fed speeches and manufacturing readings will grab some of the attention in the next couple of days. But the spotlight will shine brightest on the latest employment figures later this week. This will start with the job openings and labor turnover data, followed by ADP private payrolls and initial jobless claims on Wednesday and Thursday. The headliner will then hit the stage on Friday with the nonfarm-payrolls report for September. Markets would probably prefer a goldilocks reading (not too hot, not too cold) that indicates the economy is still on sound footing but not accelerating at a pace that would reignite inflation pressures and threaten the Fed's ability to continue to lower rates over the next several months.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet **Bloomberg, three-month returns for the S&P 500, Russell 2000, MSCI EAFE, and MSCI Emerging Markets indexes. Sector returns for the S&P 500 GICs level-1 sector indexes.}

• Dow hits a new record, but Nasdaq lags: Equity markets finished mostly higher on Friday, helped by a batch of favorable U.S. inflation data. Headline personal consumption expenditures (PCE) inflation rose by 2.2% year-over-year in August, the lowest reading since 2021, while core PCE rose by 2.7%, in line with consensus expectations.* The energy and utilities sectors led the gains, but tech stocks declined, as NVIDIA declined 2% on reports that China is urging local companies to avoid using the firm's chips.* Overseas, Asian markets rallied overnight, with Japan's Nikkei gaining over 2%, while Chinese markets were higher by roughly 3%.* China's CSI 300 Index has risen over 15% in the past five trading days, the best five-day stretch since November 2008.* The rally in Chinese markets has come after a slew of stimulus measures announced earlier this week by Chinese policymakers to support the struggling economy. Bond yields finished lower, with the 10-year yield falling to 3.75%, while the 2-year yield dropped to 3.56%.*
   
• Inflation continues to trend in the right direction: Today's personal consumption expenditures (PCE) data showed that inflation continues to trend in the right direction (lower). Headline PCE rose by 2.2% year-over-year in August, slightly below expectations and the lowest reading since February 2021.* Core PCE, which excludes the volatile food and energy components, rose by 2.7% year-over-year, in line with consensus expectations, while the monthly gain of 0.1% was below expectations for a 0.2% gain.* The August data brought the three-month annualized change in core PCE to 2.06%, in line with the Fed's 2% inflation target for the second month in a row.* Looking into which components drove the favorable August reading, goods prices outright deflated, falling by 0.2% in August and declining for the fourth consecutive month.* Services prices rose by 0.2% in August, with housing inflation continuing to run stubbornly high, rising by 0.5% for the month.* Overall, today's reading shows that inflation continues to move in the right direction, and is consistent with the Fed's decision to shift its focus to the employment side of its dual mandate (stable prices and maximum employment).
   
• Sector leadership has broadened in the third quarter: Equity markets have continued to perform well, with the S&P 500 up 5.6% in the third quarter and nearly 22% year-to-date.** As opposed to recent quarters, when stock-market gains have been driven by mega-cap technology stocks, third-quarter performance has seen a broadening of leadership. Utilities has been the top-performing sector this quarter, higher by nearly 18%, followed by real estate, which has posted a 16% gain.** Cyclical sectors, such as financials, industrials and materials, have seen strong returns as well, each higher by 9.9% or better for the quarter.** Meanwhile, the information technology sector has gained 2%, while communication services is roughly flat.** We expect the combination of Fed rate cuts in the absence of recession to help support stocks in the months ahead, perhaps with cyclical and defensive sectors continuing to perform well.

Brock Weimer, CFA
Associate Analyst

^{Source: *FactSet **FactSet. Total return in local currency. Returns through 9/26/2024.}

• Stocks rise with help from China stimulus and AI tailwinds – Equities closed higher on Thursday, as risk appetite got a boost from news that Chinese policymakers will be adding fiscal stimulus to the monetary-policy support that was announced earlier this week. China's economy and markets have been languishing of late, so the prospects of stimulus for the world's second-largest economy have boosted spirits for global equities. Markets received additional help from the tech sector, spurred by a strong quarterly report from Micron that added support to the broader AI growth story. The day's move added to stocks' gains for the week, with the S&P 500 on pace for its sixth positive week in the last seven. Elsewhere, the bond market was rather quiet today, with 10-year yields little changed. Commodities were mixed, with gold edging higher (monetary stimulus), copper prices jumping (renewed growth prospects in China), and oil prices moving notably lower (changes to the production outlook and price targets in Saudi Arabia).*
   
• Full slate of data point to a steady economy – Key reports out on Thursday aligned to the view that the economy, while decelerating from last year's pace, remains in solid shape. The final revisions to second-quarter GDP confirmed that growth held the 3% pace last quarter, as household consumption continues to hold in nicely. While that report is more a confirmation of where we've been, durable goods and employment readings released this morning indicate that we're not in the midst of a sharp drop-off. Durable goods orders came in ahead of consensus expectations, with core orders (stripping out some volatile categories) rising at the best month-on-month pace in eight months. Lastly, initial jobless claims ticked lower for the third-straight week, hitting their lowest since May. This should help further allay fears of a crumbling labor market that would bring about a more immediate economic downturn. In sum, we think this basket of data signals that employment and demand conditions are consistent with an economy that is likely moving to a lower gear but still moving forward at a speed that can validate the recent stock-market rally.
   
• Inflation data on deck – With markets riding the wave of rate-cut optimism since the Fed's meeting last week, there will be particular focus on Friday's fresh read on inflation. The release of the core PCE inflation measure – the Fed's preferred gauge of consumer prices – is expected to show a year-over-year increase of around 2.7%*, which would support the view that inflation pressures are not yet in the rearview but remain on a broader trend of moderation back toward the Fed's target. The rally in equities and drop in bond yields is pricing in a soft landing for the economy that is predicated on a string of rate cuts over the coming year. We doubt tomorrow's PCE reading will upend that narrative, but any hiccups in the inflation story would likely instigate some volatility, given the markets have baked in a fair amount of Fed policy easing. We think the Fed has shifted its focus toward the softening labor market, so policy will not dramatically shift on any single piece of data, but inflation readings over the coming months will be key for the stock and bond markets.

Craig Fehr, CFA
Investment Strategy

^{Source: *FactSet}