Wentz Weekly Insights
Stocks Fall With Apple in Focus

Stocks took a risk off stance for most of the holiday shortened week, but much of the S&P 500 decline was due to a strong read on activity in the services sector and late week reports on Apple that sent its shares down 6% for the week. The reports stated China is telling its government workers they are no longer able to bring Apple products to work, with additional reports saying China was looking into extending the iPhone ban to state firms and agencies.
The strong data on the services sector came from the ISM non-manufacturing survey index. The Institute of Supply Management (ISM) conducts a monthly survey of both manufacturers and services business and compiles and index that reflects general activity based on the survey results. The index was better than expected at 54.5, over 2 points more than expected and the best read in six months (a reading over 50 reflect growing activity and under 50 reflects contracting activity). Three-fourths of the industries reported growth. However, creating more inflation worries was the prices index was 58.9 for the highest reading since April with 12 of the 18 industries reporting higher prices in the month, in addition to employment needs at the highest since January 2021.
The S&P 500 finished the week down 1.29%, the tech heavy NASDAQ fell 1.93% while the small cap index (Russell 2000) fell 3.61%. Meanwhile, Treasuries fell as yields moved higher across the curve (both short and long maturities) due to stronger economic data and additional worries inflation could accelerate over the next several months. The monetary policy sensitive 2-year Treasury yield rose 10 basis points (bps – one basis point equals 0.01%) to 4.97% while the 10-year Treasury yield rose 9 bps to 4.27%. Both have been stuck in a narrow trading range since the beginning of August as investors wait to see how high rates might go this year. The aggregate bond index is now down 1% so far this year, compared to an equally weighted S&P 500 index, which is up 5.6% year-to-date.
Apple will remain in the news this week as Tuesday it will hold its annual product event where the event invitation was titled “Wonderlust.” It is widely expected Apple will reveal its new iPhone 15 along with expectations on a new Apple Watch and potentially new AirPods. There are not expected to be dramatic changes to the new iPhone but a switch to a USB-C standard charger has been discussed, along with updated processors and cameras. Apple is the most valuable US company with a $2.8 trillion market cap, so this is widely followed, particularly as bans from China loom and the smartphone market slows – global smartphone shipments were down in the second quarter compared to a year earlier, according to Counterpoint Research.
Market participants’ focus will also shift back to inflation with an acceleration in the consumer price index expected in August after oil saw a 23% increase over the past three months. The index is expected to have increased 0.6% in August, the highest monthly increase since June 2022 with core prices (which exclude food and energy) expected to be up 0.2% which has been consistent with the recent trend. The 12-month change in prices is expected to have accelerated to 3.6% from 3.2% but come down slightly to 4.4% for core prices, a move in the right direction but still double the Fed’s targeted pace of 2%.
The data will be important for the Federal Reserve as the next meeting comes next week and will include policymakers projections on things such as growth, inflation and employment. The FOMC is widely expected to hold rates steady but an acceleration in inflation could put upward pressure on projections and create a market reaction.
With the consensus odds of a recession at over 50%, including our probabilities, we prefer a defensive stance in this environment. Money market investments are still providing annual yields of over 5.25% with no downside exposure. The same return on the S&P 500 would put the index at 4,700 for a new 52-week high and just below the record highs from early 2022, possible, but difficult to achieve given the headwinds ahead. On the other hand, the downside exposure is significant – a recession typically brings a 30%+ drawdown in stocks. For context, the average price target of the S&P 500 from about 20 equity strategists was 4,320, a 3.1% drawdown from current levels.
Week in Review:
Investors came back from the holiday weekend less optimistic than the previous week ended. Economic data from China and Europe suggested a weakening services sector while the continued rise in oil sparked additional inflation worries. Oil received more attention as well after it saw its ninth consecutive day of gains to the highest level since November after the Saudis and Russia announced they would extend production cuts. Fed speak was mixed with Governor Waller and Cleveland’s Mester speaking and reiterating Powell’s recent comments that risks are more balanced, the Fed will be data dependent, but not ruling out additional rate increases. Treasury yields moved back up after the declines the week prior with the 10-year yield back near the highest levels of the year while stocks were lower across the board with a weak day for small caps, the Russell 2000 fell 2.10%, while the S&P 500 fell 0.42%.
A hotter than expected reading from the ISM services index (a survey on conditions in the services sector) pushed stocks lower and fixed income yields higher. A hotter reading is not the evidence the Fed wants that demand in services is cooling. The prices index in the survey moved to the highest level since April and employment the strongest in two years. Investors favored defensive sectors with growth underperforming – the Dow fell 0.57% while the NASDAQ fell 1.06%.
Thursday lacked any notable headlines, beside continued focus on Apple after reports that China was looking to expand its ban on usage of the iPhone for government and state agency workers. These headlines put additional pressure on tech stocks with the NASDAQ underperforming with a 0.89% decline. At the same time Treasury yields were lower while oil saw a slight decline, losing its ninth straight day of gains, the longest since January 2019.
Friday ended up being another quiet way to end the week. Media reports noted the day’s Fed speak with nothing new and that the Fed could afford to not raise rates and the next meeting and wait until the following one instead. Both the fixed income and equity markets were relatively unchanged with the S&P 500 finishing up 0.14%.
The good news is bad news narrative was back in markets last week with bond yields moving higher on stronger economic data and sending stocks lower over the thought markets can handle higher rates for longer. Otherwise it was a quiet holiday shortened week. Treasury yields moved higher after a brief pullback – the 2-year yield increased 10 basis points to 4.97% while the 10-year increased 9 bps to 4.27%. Oil had another positive week, rising 2.3% for the highest level in almost a year, the dollar index gained 0.8% for its eighth straight week of gains, gold fell 1.2%, while the major US stock indices finished as follows: Dow -0.75%, S&P 500 -1.29%, NASDAQ -1.93%, and Russell 2000 -3.61%.

Recent Economic Data

  • In August there were 15.04 million vehicles sold (on an annualized pace) which is down from the 15.66 million pace in July and below the consensus expectation of 15.6 million. The highest monthly sales pace of the year was 16.05 million in April. The pre-pandemic trend was around 17.0 million.
  • Factory orders declined by 2.1% in July, slightly better than the 2.3% decline expected for the weakest monthly change in factory orders since November and follows a 2.3% increase from June. Much of the weakness came from transportation (aircraft) with the index excluding transportation up 0.8%, much better than 0.2% increase expected, for the best month since January. The important read for GDP is final shipments of nondefense durable goods excluding aircraft which was down 0.3% as expected.
  • The trade deficit was $65.0 billion in July, up $1.3 billion from June’s deficit. The good news is trade activity picked up in the month of July with both exports and imports increasing. Exports rose 1.6% to $251.7 billion, while imports rose 1.7% to $316.7 billion. However, trade activity is still down year-to-date compared to 2022 and imports are near the lowest levels in two years. Exports through the first seven months are up 1.6% while imports are down 4.3%.
  • The ISM services index (non-manufacturing) came in much hotter than expected, according to the August survey. The index was 54.5, better than the 52.4 expected and was the best index level in six months with 13 of the 18 industries reporting growth. The more important component of the index, prices paid, was 58.9 for the highest level since April’s 59.6 and well above the low of 54.1 in June with 12 of the industries reporting higher prices. Employment improved and was the best since January 2021, while respondents were noted saying the trouble in employment is the supply of workers, not their demand of workers.
  • The number of unemployment claims filed the week ended September 2 fell 13k from the prior week to 216,000, the lowest weekly number since February. The four-week average was 229,250, down 8,500 from the prior week. Continuing claims totaled 1.679 million, down 40k from the prior week and the lowest since January, with the four-week average roughly unchanged at 1.719 million. While it appears hiring is slowing, the number of those looking for unemployment benefits has remained very low, signs the labor market is in a good spot. That doesn’t mean much for the next 12 months though – the trend could also quickly change.
  • US worker productivity increased an annualized rate of 3.5% in the second quarter, revised down slightly from a 3.7% increase estimated in the first release last month. The increase in was due to a 1.9% increase in output and 1.5% decline in the hours worked. The downward revision was driven by a large upward revision in unit labor costs which rose 2.2% in the quarter, 0.6% higher than the first estimate, due to a 5.7% increase in compensation and 3.5% increase in productivity. The 12-month change in productivity was +1.3%, the first positive 12-month change since Q4 2021. Remember productivity is one of the most important factors for longer-term economic growth.

Company News

  • Warner Bros Discovery, distributor of the Barbie movie, said due to the ongoing Hollywood strikes, it expects its EBITDA forecast to be lower than it previously disclosed. It expects a negative impact between $300 and $500 million, now expecting EBITDA for the year between $10.5 billion and $11 billion.
  • A WSJ report said Amazon failed to offer concessions to the Federal Trade Commission (FTC) over antitrust claims and the FTC is planning to file an antitrust lawsuit against the company later this month because of its business practices. The lawsuit targets Amazon’s fulfillment logistics program, how Amazon favors its own products over competitors, and how it treats third-party sellers. The lawsuit is expected to suggest “structural remedies” that could include breaking up the company. The report stated the legal team at Amazon held a call with the FTC last month to try to prevent a lawsuit.
  • Shares of Roku moved higher after it said in continuing with its expense reduction measures it will take additional steps to bring down its operating expense growth through multiple measures including a 10% reduction in its workforce. In addition, it is updating its Q3 (current quarter) revenue guidance and raising it by $35 million to $855 million which is almost $30 million above the consensus estimate, while increasing its EBITDA guidance as well.
  • Apple moved lower last week after the WSJ reported the Chinese government told its central government agencies not to use Apple’s iPhones for work or bring them into the office. Later in the week, another report said China is looking to expand its ban of iPhones to state firms and agencies. China is a major source of income for Apple as it generates roughly 20% of its total revenue from the region. Interestingly, the reports come at the same time China based Huawei released its own high speed smartphone.
  • J.M. Smucker agreed to purchase Hostess Brands, maker of brands such as Twinkies, in a cash and stock transaction valued at $34.25/share. The deal represents a total value of $5.6 billion, a 22% premium to where Hostess stock traded before the announcement, and roughly 54% above where the stock was trading prior to acquisition rumors in late August. Smucker said it expects run rate synergies of about $100 million.

Other News

  • The price of crude oil rose 2.8% last week, rising to the highest level since November 2022 and ending the week at $87.51 after news the Saudis and Russia would extend their production cuts through the end of the year, longer than what most were expecting. The move keeps Saudi Arabia’s oil output at 9 million barrels/day, a 1 million bbl/day cut from its original production targets prior to July, and Russia’s reduction will continue to be 300k bbl/day. The statement by Saudi Arabia says the move was to support the “stability and balance of oil markets.”
  • Central bank updates:
  • The Bank of Canada left its policy rate at 5.0% saying recent evidence suggests excess demand in the economy is easing, however it said it “remains concerned about the persistence of underlying inflationary pressures,” and prepared to raise rates again if needed.
  • Comments from European Central Bank policymakers last week were more hawkish. Remarks pushed back on the speculation the central bank would cut rates soon after reaching a peak rate, and that markets may be underestimating additional rate hike chances.
  • Fed Governor Waller said it was a “hell of a good week” of economic data last week on the labor market, said the Fed can sit and wait to see if the data continues to come in the way it did last week, while saying the Fed can afford to keep rates higher for longer to confirm inflation is trending lower versus the recent data being an outlier. He warned the Fed has been fooled twice already, thinking inflation was transparent in the beginning, then thinking inflation was coming back down after its spike, only to reaccelerate. He said the balance of risks is more even; the risk of doing too much is more balanced with the risks of doing too little.
  • Boston’s Fed president Susan Collins said she believes the Fed will need to hold rates at these restrictive levels for “some time.” She said while the Fed is at or near a peak rate further tightening could still be warranted but that will depend on incoming data. She said policy will take longer to be felt in the economy due to strong businesses and household fundamentals.

WFG News

The Election & Its Impact on The Markets:

Wentz Financial Group is happy to announce we will be brining back guest speaker Phil Orlando for a discussion on his and Federated’s thoughts on the current market and economic environment. Phil will expand on the election of 2024 and its implications for markets. Phil Orlando is Chief Equity Market Strategist of Federated Investors with over 43 years of experience and is responsible for formulating Federated’s views on the economy, markets, and the firm’s investment positioning strategies. RSVP early as this event will reach capacity quickly!
Tuesday, October 3 @ 6:00 pm
Wednesday, October 4 @ 12:00 pm

The Week Ahead

There are several notable events that will be in focus in the coming week. For the markets and Fed the most important will be the inflation data coming on Wednesday with the consumer price index. Consensus estimates see a 0.6% monthly increase in August, the largest in several months due to higher gas prices, with the core index up 0.2% and 4.4% from a year ago, falling from the 12-month pace of 4.7% in July. We will not hear from any Fed policymakers as they go into a blackout period ahead of next week’s FOMC policy meeting. In other central bank news, the European Central Bank will hold its policy meeting this week where a rate increase is still on the table. Tech will be the other area in focus. First, Apple holds its product event on Tuesday where it is widely expected it will reveal its iPhone 15 and potentially other products. Google heads to trial in a key antitrust case against the company over its search business. Also, Arm Holdings will hold its initial public offering (IPO) and could set the tone for future IPOs for the remainder of the year. Other corporate related news is in regards to the United Auto Workers contract with the Big Three US automakers expiring Thursday and worries are that a strike will commence which could cost the automakers billions. Other items on the economic calendar include jobless claims, the producer price index, and August retail sales, and Friday’s releases will include the Empire State manufacturing index, import and export prices, industrial production, and the first read on September consumer sentiment.