What happened last week
- Stronger economic data and domestic political turmoil contributed to a resumption of the bond sell-off.
- Stocks reversed early weakness as a better-than-expected jobs release pointed to a normalizing labor market.
- A volatility sell-off in crude oil hit energy stocks, likely to be reversed this week due to increased geopolitical risk.
What we’re watching this week
- CPI for September is the data highlight, while Fed speakers weigh in throughout the week.
- Large banks’ earnings kick off the third quarter earnings season on Friday.
- We are monitoring for Israeli retaliation to the weekend’s surprise attack; a targeting of Iran is a significant risk for markets.
Horizon’s Investment Management Views
- The sell-off in Treasuries continued last week as global stocks defied the move in bonds and closed higher, led by mega-cap tech. Domestic political turmoil likely contributed to the Treasury sell-off; in a historic moment, Speaker of the House Kevin McCarthy was ousted. McCarthy lost control of the House on Tuesday following a last-minute deal with Democrats that narrowly avoided a government shutdown. The 30-year Treasury traded above the key 5% level twice in the past week, the highest since 2007: the first was in the aftermath of McCarthy’s loss of the Speakership, the second on the back of a much stronger than expected nonfarm payrolls print.
- During the initial knee-jerk reaction to the much stronger-than-expected September nonfarm payrolls figure, Treasury yields increased as equities dropped by more than 1%. The market reaction reversed as investors parsed the data, particularly the smaller-than-expected wage rise. Although the labor market remains tight, falling wage pressures indicate that the supply-demand imbalance is normalizing – the Fed is unlikely to tighten further if stronger-than-expected wage gains do not accompany stronger-than-expected job gains.
- Although crude oil tanked by nearly 9% last week, the weekend’s action in the Middle East could reverse this move quickly. Hamas’ surprise attack on Israel and Israel’s declaration of war in response could broaden into a regional conflict. Iran, which has historically financed and supported Hamas, could be targeted by Israel in retaliation, risking an escalation that could disrupt the global supply of crude oil. Even without escalation, investors are likely to price in higher risk premia across the energy sector and differentiate between countries and regions based on their net energy profile.
Disclosure
CPI = Consumer Price Index. The commentary in this report is not a complete analysis of every material fact in respect to any company, industry or security. The opinions expressed here are not investment recommendations, but rather opinions that reflect the judgment of Horizon as of the date of the report and are subject to change without notice. Forward looking statements cannot be guaranteed. We do not intend and will not endeavor to provide notice if and when our opinions or actions change. This document does not constitute an offer to sell or a solicitation of an offer to buy any security or product and may not be relied upon in connection with the purchase or sale of any security or device. Before investing, an investor should consider his or her investment goals and risk comfort levels and consult with his or her investment adviser and tax professional. Equities are represented by the S & P 500 Index which is a market-capitalization-weighted index of the 500 largest U.S. publicly traded companies. Small-cap stocks are represented by the S&P 600 Index which covers roughly the small-cap range of American stocks, using a capitalization-weighted index. References to indices, or other measures of relative market performance over a specified period of time are provided for informational purposes only. Reference to an index does not imply that any account will achieve returns, volatility or other results similar to that index. The composition of an index may not reflect the manner in which a portfolio is constructed in relation to expected or achieved returns, portfolio guidelines, restrictions, sectors, correlations, concentrations, volatility or tracking error targets, all of which are subject to change. It is not possible to invest directly in an index. This commentary is based on public information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied on as such. Horizon Investments and the Horizon H are registered trademarks of Horizon Investments, LLC.
