Stocks are struggling under the dual pressure of rising oil prices and higher Treasury yields. The market experienced a brief rally on Friday following a weaker-than-expected jobs report, which fueled hopes for the Federal Reserve to pause interest rate hikes. However, broader market indices ended the week in the red, with tech stocks like Nvidia showing particular strength.
Analysts suggest that while October has a reputation for volatility, it can be a strong month for stocks, especially in midterm election years. The current market breadth, however, remains a concern, with a significant portion of the S&P 500 underperforming, but this could also precede a year-end rally if earnings season proves positive.
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Wall Street navigates a market caught between rising yields and soaring oil prices, with limited economic data ahead of the Q3 earnings season.
Investors are currently at the mercy of two powerful market forces: higher oil prices and increasing Treasury yields. This past week offered a glimpse of how a potential easing on either front could benefit the broader stock market. On Friday, a surprisingly weak September jobs report, suggesting the Federal Reserve might hold off on interest rate hikes this month, led to a stock market rally as yields retreated.
Simultaneously, oil prices saw a dip amid reports that the European Union is considering tapping into strategic fuel reserves. "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.
Despite a challenging environment for much of the market, the tech sector showed resilience. The Nasdaq Composite reached a new high, buoyed by a record performance from Nvidia and a general resurgence in semiconductor stocks following strong earnings from Micron Technology. However, the broader market ended the week with losses. A persistent five-week global bond sell-off and crude oil prices hovering near $100 a barrel dampened sentiment, particularly affecting sectors sensitive to interest rates and economic conditions. The Dow Jones Industrial Average fell 1.3% for the week, and the S&P 500 declined by 0.3%.
Looking ahead, October, despite its historical reputation for market downturns, could offer some relief. In midterm election years, October has historically been a strong month for major averages. Data from the Stock Traders' Almanac indicates an average gain of 3% for both the S&P 500 and the Dow Industrials in Octobers of midterm election years since 1950.
A key question for the coming month is whether any stock market strength will broaden beyond the current narrow leadership, which has been heavily concentrated in AI-related stocks. While the S&P 500 neared all-time highs last month, with tech leading the charge, a closer look reveals that three-quarters of the index's components were actually down. This disparity suggests a potentially fractured market. Bespoke Investment Group reported that September saw historic underperformance for the S&P 500 Equal-Weight ETF (RSP) compared to the cap-weighted S&P 500 ETF (SPY), lagging by 4.6 percentage points. This margin of underperformance has only been wider in two other months since 2003: March 2023 and March 2020.
However, this poor market breadth could also signal a market that is becoming oversold, potentially setting the stage 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 currently trading above their 50- and 200-day moving averages. He noted that investors often begin to buy into stocks once this momentum metric falls below 10%, suggesting that the worst of the downturn may be nearing an end.
Week Ahead Economic 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
