Welcome to October surprise season

Posted by Cam Hui -
Mid-week market update: Stock market price momentum has been strong, but I did warn about possible October surprises in an election year (see S&P 500 breakout or fake-out?). In particular, I highlighted the risks of a port strike and an Israeli incursion into Lebanon, both of which have become reality.

 

Despite plenty of warnings, the share prices of logistics shipping giants FedEx and  UPS didn’t react until the strike was announced. A prolonged strike has the potential to devastate the Black Friday and Christmas shopping season and reduce Q4 GDP growth.

 

 

Here are some of the other challenges that face the market.

 

 

Semiconductor supply chain risk

One risk that I hadn’t expected is how Hurricane Helene has disrupted the semiconductor supply chain, as explained by MarketWatch:

The mines in Spruce Pine, N.C., about an hour outside of Asheville, produce a unique kind of high-purity quartz used in semiconductor manufacturing. The town is the only place in the world where the uniquely high-quality mineral can be found in such large quantities and produced for such a low price.
 

The two companies that operate the mines in Spruce Pine said they’ve shut down local facilities as widespread flooding, power and communications outages plague Appalachia in the wake of the storm.

Sibelco, which is one of the two companies operating the mines, has already sent “force majeure” letters to its customers that free it from liability if they can’t fulfill their orders.

 

This development must be a disappointment to semiconductor bulls. I am old enough to remember how everyone got excited over the clean gap and price surge by Micron, which has turned into a failed breakout.

 

 

 

Growth, growth, growth!

Now that the Fed’s attention has turned from fighting inflation to the full employment part of its mandate, what matters to stock prices is the evolution of the growth outlook. In particular, Fed speakers have highlighted the importance of the jobs market. The September Payroll Report due Friday could be pivotal in setting the tone for risk appetite.

 

I expect that Friday’s will be either roughly in line or slightly weaker than the consensus. The ADP employment report beat expectations, but a detailed analysis of the data tells a more nuanced story. Employment at small firms with less than 50 employees were weak (44% of ADP sample), while growth at large firms were healthy.

 

 

The August JOLTS report was somewhat weak. Job openings rose, but those figures aren’t reliable because of the prevalence of phantom job listings. Both hires and quits fell, which are sighs of a soft employment market. Leading indicators of employment have been weakening for some time. Temporary jobs are falling. The quits/layoffs ratio from the JOLTS report edged up, though the trend has been down.

 

 

In addition, I’ll be watching Friday for the latest EPS update this Friday from FactSet. Forward 12-month EPS estimates fell last week, which is either a data blip or the signs of a stall in fundamental momentum.

 

 

The S&P 500 is currently in a wait and see mode and consolidating its gains, with initial support at the 5600-5650 zone.

 

 

Stay tuned.