Stocks are currently being buffeted by the dual pressures of rising oil prices and increasing bond yields. A recent dip in both factors, coupled with a weaker-than-expected jobs report, offered a brief market rally, sparking hopes that the Federal Reserve might pause interest rate hikes. However, the broader market remains sensitive to these economic indicators, with a narrow leadership in tech stocks masking weakness elsewhere.
Investors are currently navigating a market landscape heavily influenced by two dominant forces: rising oil prices and escalating bond yields. This week offered a glimpse of potential relief as both factors saw a temporary pullback, leading to a rally in stocks. A surprisingly weak September jobs report fueled hopes that the Federal Reserve might hold interest rates steady at its upcoming meeting, while reports of the EU considering strategic fuel reserve releases also contributed to a dip in oil prices.
"That one-two punch of higher energy prices and higher Treasury yields has certainly kept investors on the sidelines over the course of the last month," noted Art Hogan, chief market strategist at B. Riley Wealth.
The technology sector showed particular strength, with the Nasdaq Composite reaching new highs, buoyed by a record performance from Nvidia and a broader resurgence in semiconductor stocks following positive results from Micron Technology. However, a significant portion of the broader market ended the week in negative territory. A persistent five-week global bond rout and crude oil prices hovering near $100 a barrel weighed heavily on rate-sensitive and economically exposed sectors. The Dow Jones Industrial Average fell 1.3% for the week, and the S&P 500 was down 0.3%.
Despite the recent headwinds, October, historically a volatile month, could offer some optimism. While known for significant market downturns, it also boasts the strongest average performance of the year for major stock indices during midterm election years. Data from the Stock Traders' Almanac suggests an average 3% gain for both the S&P 500 and the Dow Industrials in Octobers of midterm election years since 1950.
A key question for the upcoming month is whether any potential stock market strength will broaden beyond the AI-driven leadership that has characterized much of this year's gains. While the S&P 500 neared all-time highs last month, led by tech, a deeper look reveals that three-quarters of the index's components were actually trading lower. Bespoke Investment Group highlighted that September saw historic underperformance for the S&P 500 Equal-Weight ETF (RSP) compared to the cap-weighted S&P 500 ETF (SPY), with RSP lagging by 4.6 percentage points—a margin of underperformance not seen since March 2020 and March 2023.
However, this narrow market breadth could also signal an oversold condition, potentially paving the way for a year-end rally, especially if third-quarter earnings exceed expectations. Sam Stovall, chief investment strategist at CFRA Research, pointed out that only 12% of the 153 sub-industries within the S&P 1500 (covering large-, mid-, and small-cap stocks) are trading above their 50- and 200-day moving averages. He noted that investors often begin to increase their stock positions when this momentum indicator falls below 10%.
"Once the sense is that 'Oh my god, look! We got to get out of here,' once a majority of people are making that kind of a decision, then the worst is probably over, or soon to be over," Stovall commented.
Week Ahead Calendar (All times ET):
- Monday, Oct. 5: 9:45 a.m. S&P Global PMI Services final (September); 10:00 a.m. ISM Services PMI (September)
- Tuesday, Oct. 6: 8:15 a.m. ADP Weekly Employment change (9/19); Earnings: Constellation Brands
- Wednesday, Oct. 7: 2:00 p.m. FOMC Minutes; 3:00 p.m. Consumer Credit (August)
- Thursday, Oct. 8: 8:30 a.m. Initial Claims (10/02); 10:00 a.m. Wholesale Inventories (August); Earnings: PepsiCo
- Friday, Oct. 9: 10:00 a.m. Michigan Sentiment preliminary (October); Earnings: Delta Air Lines
