SPX Equal Weight Sees 7th Week of Losses, Hidden Strength in September Jobs Report

Samuel (0:00)

Let's talk more about the macro, though. Welcome back to Morning Trade Live. It's time now for the big picture. Let's welcome in the team from Charles Schwab. Collin Martin, the head of Fixed Income Research and Strategy Schwab Center for Financial Research, and Alexanandra Semenova, Financial Insights Strategist over at Charles Schwab. Thank you to both of you for your time today. Collin, just kicking things off with you, what did you make of the jobs report and the reaction we're seeing in the market?

Collin Martin (0:21)

Yeah, we're seeing treasury yields move down pretty sharply on the news, which I think just supports the case that the Fed doesn't really need to act urgently here, which is in line with our base case, where we think two rate hikes going forward seems appropriate, but there doesn't seem to be a rush right now. Many Fed officials have highlighted to the idea that the labor market isn't necessarily a source of the inflation, and this supports that case, especially when you look at wage gains, the average hourly earnings, 3% year over year, I think just 0.1% on a month over month basis, doesn't seem like that should be providing too much of a support to higher inflation.

I think the headline numbers probably mask what could be argued as some strength under the surfaces. I mean, so non-farm payrolls came in a little bit below target, we saw some negative revisions, but we saw an increase in the household survey, and we saw an increase in the participation rate. So, you know, when you net-net, it looks more like a stable labor market, maybe not so much strength right now, but a stable labor market. And I think that gives the Fed time to kind of see what the next few months of inflation readings tell us. And we've held the view that it's going to be inflation in the driver's seat right now, and I think that remains to be true right now.

Samuel (1:37)

Yeah, it certainly helps them continue to keep an eye on that side of the mandate. So in that case, Alexanandra, I mean, what are you watching right now? I mean, how have you been looking at the data we got, not just today, but also that cooler than expected PCE, coupled with some of the more sort of perceived dovish views from Fed members this week?

Alexanandra Semenova (1:56)

Yeah, Samuel, markets are certainly welcoming that cooler data today, dialing back their expectations for continued rate hikes, and that is giving a nice boost to equity markets. But something that we have been paying very close attention to is how few stocks have been shouldering this rally in the S&P 500 So, on the surface, there's this misconception that the market has been unscathed by higher yields and the threat of inflation. However, when you look underneath the S&P 500, which is still hovering your all-time highs, there are pretty some dramatic, there are very dramatic deteriorations in breadth. So looking at the equal-weighted version of the index, for example, it is on track for a seventh straight week of losses, which is something that has happened, I believe, only three times in history.

Roughly a third of S&P 500 stocks through yesterday closed 30% or more below their all-time highs. So that is just telling you that it is a handful of companies really carrying the index forward.

Samuel (2:50)

Yeah.

Alexanandra Semenova (2:50)

And of course, that math can work in reverse, right? If there is any deterioration in the growth story, in demand for AI, then things can go in the other direction. So from here, bad breath is not necessarily a precursor to a correction. However, it just means that we are watching for more stocks to give the rally a better foundation.

Samuel (3:12)

And I guess a lot of people are hoping that it's going to be the earning season, that's going to be that catalyst, certainly as far as some rotation into those other parts of the market, which have been performing quite well, to your point, but it brings us back to the concentration risk. And Collin, as Alex highlighted there, I mean, obviously we've been watching these yields. I mean, what a dramatic move yesterday. I mean, chiropractors must have been very busy yesterday afternoon when you're watching the 10-year. I'm just wondering how you're thinking about this.

What is this being driven by? Because, I mean, the move yesterday to the upside and the downside for that 10-year yields, I mean, how much of that has got to do with what we got from ISM, with that prices paid component? How much has it got to do with 534 triggering the algos? How much has it got to do with a flight to safety for US treasuries and you've got that spread between the French and German bonds at 150 bips?