After a challenging few months, investors skeptical at start of October. But we remain constructive on stocks into YE, even with near-term risks.

We discuss: 2023 has been characterized by skepticism of the economy and markets and yet equities have risen.  The best entry points have been when market skepticism is the highest ala March 2023 or even Oct 2022.  This is the perspective we have as we look towards the final 3 months of 2023

Please click below to view today’s Macro Minute (Duration: 7:21).

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Equities have been under selling pressure for the past two months, enough to push the S&P 500 down -3.6% in the 3Q2023 (still up 11% YTD.) And for many, the macro picture remains too messy near-term for stocks to stage any meaningful recovery into year-end. To me, this skepticism of stocks recovering in the final quarter of 2023 is growing. But at the same time, one could make the argument that we have enough fear/skepticism that much of the bad news is discounted.

• One cannot easily dismiss the macro and valuation risks/headwinds given the:
  – UAW strike
  – surge in oil on headline inflation
  – rise in longer interest rates tightening financial conditions
  – and a Fed seemingly on pause, muddled where to “stop”
  – fortunately, risk of a looming government shutdown averted
• To those bearish/skeptical, each of the above represents a potential shock that could finally tip the US into a recession. And in their view, be a validation of the persistently inverted yield curve. A shock is historically needed to create a recession dynamic (that is, a sudden change in business conditions). But the US economy remains resilient, defying many expectations. Recall, at the start of this year, many expected a recession to start in early 2023, and as the year moved on, that bogey kept getting pushed out.
• Our stance on equities remains constructive, anchored by the view that the US consumer and economy remain healthy, and this is enabling corporate profits to rise over the coming quarters. In fact, looking at the latest bottoms up estimates for 3Q23, S&P 500 EPS ex-Energy is expected to rise +6.7% YoY, improving upon the +3.6% YoY seen in 2Q23. Recall, many topdown strategists expressed skepticism that earnings could even recover to positive YoY at any time in 2023.
  – 7 of 11 S&P 500 sectors expected to show positive YoY in 3Q23
  – 5 of 11 S&P 500 sectors showed positive YoY in 1Q23
  – so a vast improvement in just 2 quarters
• There is a lot of key economic data this week starting with:
  – Monday 10/2: Sep ISM Manufacturing, Street 47.9
  – Tuesday 10/3: Aug JOLTS (job openings), Street 8,830k
  – Wednesday 10/4: Sep ISM Services, Street 53.5
  – Friday 10/6: Sep jobs report, Street +165k
• In totality, we expect this incoming data to paint a picture of a US economy remaining healthy, but slowing compared to the above trend pace of 2022. The rise in interest rates is a tightening of financial conditions, but this effect on US growth is more acute but takes longer to be visible, and thus, more of a 2024 impact.
• Last Friday, the August PCE inflation report was released and shows inflation continues on its glidepath below expectations. Core PCE 3m-annualized is now essentially at the Fed target of ~2% and the only major component meaningfully elevated is housing. This housing inflation figure should decelerate in coming months. Sure, there might be some future noise as healthcare insurance premiums see a step up in October, but the overall trend is painting a picture of slowing inflation.
• As for the UAW strike, currently 25,300 of the 146,000 members are on strike (per Detroit News). How and when this strike will end is not known and is weighing on equity markets. But in our view, the structural impact on stocks is not significant, unless the strike spreads wide enough to cripple the economy enough to trigger a recession. In our view, that would be a negative outcome but the probability is not high enough for us to change our view on markets.
• Would a concession to the UAW to higher wages actually trigger a wage-price spiral? That is the concern many harbor. Goldman Sachs Economists latest commentary on this is insightful. They note that union wages tend to be a lagging indicator (labor agreements are multi-year) and the latest demands would not overall affect the path of US wage growth towards 3.5%. Part of this is due to the fact that union membership is a small percentage of the workforce. And part reflects that the media reports exagerate, to an extent, the magnitude of wage concessions (outside UAW). Overall, union wage increases are expected to only add 15bp to wage growth, per Goldman Sachs.

BOTTOM LINE: Investors are skeptical/fearful, after a painful 8 week correction since July

We remain comfortable with the view that equities can rally into the end of 2023. There has been significant technical damage over the past 8 weeks, and this breakdown is not instantly reversed as we move into October. But as Mark Newton, Head of Technical Strategy, notes, the price level of the S&P 500 is approaching an area of attractive risk/reward.

• The intermediate fundamental picture will be clear as the UAW strike is eventually settled. But we believe it is a mistake to entirely avoid equity exposure until this strike is settled.
• More importantly, do we expect the Fed to become more dovish or more hawkish over the balance of 2023? We believe incoming data will show a weakening of momemtum, with further downside from the ongoing UAW strike. And the trend in inflation remains downwards (not all agree), and even as oil and other items might show a gain, the overall trend is lower, we expect.

As we start October, our confidence of equities rising in the next few months is high. But we acknowledge that near-term visibility is hurt by this ongoing strike. Ultimately, this should prove to be a buying opportunity.

Key incoming data October

•  10/2 10am ET September ISM Manufacturing
•  10/3 10am ET JOLTS Job Openings August
•  10/4 10am ET September ISM Services
•  10/6 8:30am ET September Jobs Report
•  10/6 9am ET Manheim Used Vehicle Index September Final
•  10/11 8:30am ET September PPI
•  10/11 2pm ET Sep FOMC Meeting Minutes
•  10/12 8:30am ET September CPI
•  10/13 10am ET U. Mich. September prelim 1-yr inflation
•  10/16 8:30am ET October Empire Manufacturing Survey
•  10/17 8:30am ET October New York Fed Business Activity Survey
•  10/17 9am ET Manheim October Mid-Month Used Vehicle Value Index
•  10/17 10am ET October NAHB Housing Market Index
•  10/19 8:30am ET October Philly Fed Business Outlook Survey
•  10/24 9:45am ET S&P Global PMI October Prelim
•  10/26 8:30am ET 3Q 2023 GDP Advance
•  10/27 8:30am ET September PCE
•  10/27 10:00am ET Oct F UMich Sentiment and Inflation expectation
•  10/30 10:30am ET Dallas Fed September Manufacturing Activity Survey
•  10/31 9am ET August S&P CoreLogic CS home price
•  10/31 10am ET October Conference Board Consumer Confidence

Key incoming data September

•  9/1 8:30am ET August Jobs Report Tame
•  9/1 10am ET August ISM Manufacturing Tame
•  9/6 10am ET August ISM Services Mixed
•  9/6 2pm ET Fed releases Beige Book Tame
•  9/8 9am ET Manheim Used Vehicle Index August Final Tame
•  9/8 2Q23 Fed Flow of Funds Report Tame
•   9/13 8:30am ET August CPI Mixed
•  9/14 8:30am ET August PPI Tame
•  9/15 8:30am ET September Empire Manufacturing Survey Tame
•  9/15 10am ET U. Mich. September prelim 1-yr inflation Tame
•  9/18 8:30am ET September New York Fed Business Activity Survey Tame
•  9/18 10am ET September NAHB Housing Market Index Tame
•  9/19 9am ET Manheim September Mid-Month Used Vehicle Value Index Mixed
•  9/20 2pm ET September FOMC rates decision Market saw Hawkish
•  9/21 8:30am ET September Philly Fed Business Outlook Survey Mixed
•  9/22 9:45am ET S&P Global PMI September Prelim Tame
•  9/25 10:30am ET Dallas Fed September Manufacturing Activity SurveyTame
•  9/26 9am ET July S&P CoreLogic CS home price Hot
•  9/26 10am ET September Conference Board Consumer ConfidenceMixed
• 9/29 8:30am ET: August PCE Tame
• 9/29 10:00am ET: Sep F UMich Sentiment and Inflation expectation Tame

Key incoming data August

• 8/1 10am ET July ISM Manufacturing Tame
• 8/1 10am ET JOLTS Job Openings Jun Tame
• 8/2 8:15am ADP National Employment Report Hot
• 8/3 10am ET July ISM Services Tame
• 8/4 8:30am ET July Jobs report Tame
• 8/7 11am ET Manheim Used Vehicle Index July Final Tame
• 8/10 8:30am ET July CPI Tame
• 8/11 8:30am ET July PPI Tame
• 8/11 10am ET U. Mich. July prelim 1-yr inflation Tame
• 8/11 Atlanta Fed Wage Tracker July Tame
• 8/15 8:30am ET Aug Empire Manufacturing SurveyMixed 
• 8/15 10am ET Aug NAHB Housing Market IndexTame
• 8/16 8:30am ET Aug New York Fed Business Activity SurveyNeutral
• 8/16 2pm ET FOMC MinutesMixed 
• 8/17 8:30am ET Aug Philly Fed Business Outlook Survey Positive
• 8/17 Manheim Aug Mid-Month Used Vehicle Value IndexTame
• 8/23 9:45am ET S&P Global PMI Aug PrelimWeak
• 8/25 10am ET Aug Final U Mich 1-yr inflationMixed
• 8/28 10:30am ET Dallas Fed Aug Manufacturing Activity Survey Tame
• 8/29 9am ET June S&P CoreLogic CS home price Tame
• 8/29 10am ET Aug Conference Board Consumer Confidence Tame
• 8/29 10 am ET Jul JOLTS Tame
• 8/31 8:30am ET July PCE Tame
• 9/1 8:30am ET August NFP jobs report
• 9/1 10am ET August ISM Manufacturing

Key incoming data July

• 7/3 10am ET June ISM Manufacturing Tame
• 7/6 8:15am ADP National Employment Report Hot
• 7/6 10am ET June ISM Services Tame
• 7/6 10 am ET May JOLTS Tame
• 7/7 8:30am ET June Jobs report Mixed
• 7/10 11am ET Manheim Used Vehicle Index June Final Tame
• 7/12 8:30am ET June CPI Tame
• 7/13 8:30am ET June PPI Tame
• 7/13 Atlanta Fed Wage Tracker June Tame
• 7/14 10am ET U. Mich. June prelim 1-yr inflation Mixed
• 7/17 8:30am July Empire Manufacturing Survey
• 7/18 8:30am July New York Fed Business Activity Survey
• 7/18 10am July NAHB Housing Market Index in-line
• 7/18 Manheim July Mid-Month Used Vehicle Value Index Tame
• 7/25 9am ET May S&P CoreLogic CS home price Tame
• 7/25 10am ET July Conference Board Consumer Confidence Tame
• 7/26 2pm ET July FOMC rates decision Tame
• 7/28 8:30am ET June PCE Tame
• 7/28 8:30am ET 2Q ECI Employment Cost Index Tame
• 7/28 10am ET July Final U Mich 1-yr inflation Tame

Key data from June

• 6/1 10am ET May ISM Manufacturing Tame
• 6/2 8:30am ET May Jobs report Tame
• 6/5 10am ET May ISM Services Tame
• 6/7 Manheim Used Vehicle Value Index May Tame
• 6/9 Atlanta Fed Wage Tracker April Tame
• 6/13 8:30am ET May CPI Tame
• 6/14 8:30am ET May PPI Tame
• 6/14 2pm ET April FOMC rates decision Tame
• 6/16 10am ET U. Mich. May prelim 1-yr inflation Tame
• 6/27 9am ET April S&P CoreLogic CS home price Tame
• 6/27 10am ET June Conference Board Consumer Confidence Tame
• 6/30 8:30am ET May PCE Tame
• 6/30 10am ET June Final U Mich 1-yr inflation Tame

Key data from May

• 5/1 10am ET April ISM Manufacturing (PMIs turn up) Positive inflection
• 5/2 10am ET Mar JOLTS Softer than consensus
• 5/3 10am ET April ISM Services Tame
• 5/3 2pm Fed May FOMC rates decision Dovish
• 5/5 8:30am ET April Jobs report Tame
• 5/5 Manheim Used Vehicle Value Index April Tame
• 5/8 2pm ET April 2023 Senior Loan Officer Opinion Survey Better than feared
• 5/10 8:30am ET April CPI Tame
• 5/11 8:30am ET April PPI Tame
• 5/12 10am ET U. Mich. April prelim 1-yr inflation Tame
• 5/12 Atlanta Fed Wage Tracker April Tame
• 5/24 2pm ET May FOMC minutes Dovish
• 5/26 8:30am ET PCE April Tame
• 5/26 10am ET U. Mich. April final 1-yr inflation Tame
• 5/31 10am ET JOLTS April job openings

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