Given that the U.S. equities sector generally features an upward bias, it was understandable that many market participants held optimistic views throughout the past week. However, as major datapoints and developments pointed to significant challenges ahead, investors ran for cover. It’s possible that the following week may represent a turning point so everyone must pay close attention.
On Friday, Oct. 7, the major equity indices printed huge losses as investors rushed for the exits. Primarily, market participants anticipate the Federal Reserve to implement a more aggressively hawkish monetary policy in light of a hotter-than-expected September jobs report. The benchmark S&P 500 index slipped 2.8% heading into the weekend. Overall, it gained nearly 0.6% for the trailing week.
For the technology-centric Nasdaq, it dropped 3.8% on Friday, though it did manage to eek out a very slight gain in the trailing week. While a net positive result, the chaos in global markets may send investors rushing for cover. Therefore, it’s important to keep track of future developments and maintain vigilance. Below are the key themes to consider for the upcoming week.
Major Escalation in Ukraine
According to an Associated Press report, an explosion on Saturday “caused the partial collapse of a bridge linking the Crimean Peninsula with Russia, damaging an important supply artery for the Kremlin's faltering war effort in southern Ukraine and hitting a towering symbol of Russian power in the region.”
At time of writing, no one claimed responsibility for the blast, which took the lives of three people. However, the “speaker of the Russian-backed regional parliament in Crimea accused Ukraine” though Moscow has yet to assign blame.
Strategically, the damage to the bridge may temporarily stymie Russia’s war effort, which has been underwhelming against prior expectations. As well, the explosion carries symbolic weight, occurring one day after Russian President Vladimir Putin’s birthday.
Moving forward, two possible implications exist for investors. First, all evidence points to the Russians doubling down on their military invasion, which means prolonged instability in eastern Europe. Second, high-profile defense stocks present cynical relevance, not only for underlying effectiveness in Ukraine but also from marketing said effectiveness to government clients worried about security vulnerabilities.
Hot Jobs Report Forces Fed's Hands
In most circumstances, a strong jobs report represents great news – more people are working, resulting in greater spending and thus more robust economic activity. However, it also implies inflation, the very problem that the Federal Reserve is attempting to correct. Therefore, with the Fed “more likely to keep raising borrowing costs rapidly, the risk of recession will also rise,” per an AP report.
On paper, the September jobs report indicated that “Businesses kept hiring at a brisk pace, unemployment fell back to a half-century low and average pay rose.” This result may just force the Fed’s hands to act more aggressively with its rate hikes, posing problems for investors and the broader economy alike.
To be fair, “Employers did pull back slightly on hiring last month, and average wage gains slowed. But economists say neither is falling fast enough for the Fed to slow its inflation-fighting efforts.”
Looking ahead, investors should exercise extreme caution about any opportunities. At this juncture, publicly traded companies benefitting from inelastic demand likely should be a priority.
Hydrocarbons to Rise Again
In the middle of last week, the Organization of the Petroleum Exporting Countries and its non-member allies – a cartel known as OPEC+ – announced that they will cut crude oil production by 2 million barrels a day starting next month, according to the Associated Press. This news comes amid efforts by western nations to cap the oil money flowing into Moscow’s war chest.
The matter is also symbolic as it represents a slap in the face to the Biden administration. Earlier this year, President Joe Biden met with Saudi Arabia’s royal family, in part to discuss oil production increases. However, the move received sharp criticism due to human rights concerns. As well, OPEC+ defying Washington’s request imposes certain reputational damage to U.S. influence and credibility.
Unfortunately, the Biden administration is stuck in a geopolitical quandary regarding an effective and face-saving response. Nevertheless, one of the higher-probability outcomes is higher hydrocarbon energy prices. Therefore, investors may want to consider hedging their portfolio through acquisitions of reliable oil and gas stocks.
Stagflation Risks Tick Up
As the post-pandemic new normal entered a fresh phase, some analysts brought up concerns about stagflation materializing. As Barchart.com contributor Arkadiusz Sieron explained, stagflation refers to “a situation in which there is high inflation and stagnation at the same time.”
So far, the economy has incurred high prices. Yet the stagnation – or period of deflated economic activity – has so far not occurred. Indeed, the September jobs report suggests that economic activity is increasing due to the hot labor market.
However, the Fed recognizes that in order to control inflation, a reduction in the employment level will be necessary. Otherwise, too much currency will chase after fewer goods, exacerbating inflation.
Unfortunately, the OPEC+ situation above complicates matters. Even if the Fed succeeds in temporarily slowing the labor market, energy prices might remain elevated due to the aforementioned production cuts. That would imply stagflation, making the current juncture a treacherous one.
Earnings in Focus
Although the upcoming earnings calendar is rather light, investors should tune into some of the more significant financial disclosures. First up on Wednesday, soft drinks and snacks giant PepsiCo (PEP) will disclose its results. Analysts anticipate earnings per share of $1.83. It will be interesting to see how a strong dollar impacted the company’s international sales.
Next up on Thursday, Delta Air Lines (DAL) will release its results for the third quarter. Analysts on average are targeting $1.55 per share. Here, market observers will want to see if travel sentiment remained strong and if Delta benefitted from the surge in demand.
Finally, banking giant JPMorgan Chase (JPM) will reveal its financial performance for the third quarter. Analysts anticipate that the company will post EPS of $2.91. As an economic bellwether, all eyes will be on JPM as investors look for clues about forward viability.
More Stock Market News from Barchart
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