CWS Market Review – October 10, 2023

(This is the free version of CWS Market Review. If you like what you see, then please sign up for the premium newsletter for $20 per month or $200 for the whole year. If you sign up today, you can see our two reports, “Your Handy Guide to Stock Orders” and “How Not to Get Screwed on Your Mortgage.”)

Wall Street Rallies on the September Jobs Report

On Friday, the government said that the U.S. economy created 336,000 net new jobs last month. That was well above expectations for a gain of 170,000. It was also an improvement of more than 100,000 jobs compared with August. September was the best month for job gains since January.

This report is very good news and it’s a sign that the economy may not be in as much trouble as the bears believe. While I’m pleased to see these numbers, I still think the economic cycle may be nearing its end.

Let me explain.

The labor market tends to be a lagging indicator. It usually tells us what just happened instead of what’s about to happen. After all, folks generally don’t lose their jobs until after business conditions weaken.

The jobs report also said that the unemployment rate was 3.8%. Wall Street had been expecting the jobless rate to fall to 3.7%.

I had been particularly interested to see the wage gains numbers. Unfortunately, they weren’t that good. For September, average hourly earnings rose by 0.2%. Wall Street had been expecting a gain of 0.3%. Over the last year, earnings are up by 4.2%. That’s above the rate of inflation but not by much. I disagree with the Fed about lots of things, but we’re on the same page on an important point. The recent bout of inflation was not caused by excess wages.

Here are some details from the jobs report:

From a sector perspective, leisure and hospitality led with 96,000 new jobs. Other gainers included government (73,000), health care (41,000) and professional, scientific and technical services (29,000). Motion picture and sound recording jobs fell by 5,000 and are down 45,000 since May amid a labor impasse in Hollywood.

Service-related industries contributed 234,000 to the total job growth, while goods-producing industries added just 29,000. Average hourly earnings in the leisure and hospitality industry were flat on the month, though up 4.7% from a year ago.

The private sector payrolls gain of 263,000 was well ahead of a report earlier this week from ADP, which indicated an increase of just 89,000.

The labor force participation rate stayed the same at 62.8%. That number has improved a lot but it’s still below the pre-Covid levels. I also like to look at the labor force participation rate for prime working-age adults. That was unchanged at 83.5%. The broader U-6 jobless rate rose to 7%.

The stock market was initially soft after the jobs report came out, but the bulls eventually got in control and the market closed higher. The rally was strong enough to continue into Monday and today. The bond market was closed yesterday for Columbus Day, but yields fell sharply today in a global desire for safety.

The problem with the economy right now isn’t jobs. The economy has created more than two million jobs this year, and there are nearly 10 million open positions. The problem is inflation.

Even if people are employed, they sense that the economy is not as good as it used to be. It’s often noted that if unemployment rises from 4% to 9%, that affects 5% of people. If inflation rises from 2% to 9%, that impacts 100% of people.

We’re at an odd point where jobs are plentiful but your money doesn’t go as far. For example, the cost of housing has been particularly hard on consumers. The median home price is up 27% since late 2019. The median age of a homebuyer is now 36. That’s the highest on record which goes back 40 years.

Wall Street seems to have reconciled itself to the fact that the Federal Reserve will pause once again at its next FOMC meeting. The Fed is scheduled to meet again on November 1.

The futures market currently places the odds of another pause decision at 86%. I was surprised to see traders place the odds of a Fed rate cut in March of next year at 25%. One week ago, those odds were at 7%. Those odds may get higher soon. The Fed doesn’t see a rate cut as probable until June 2024.

Here are the odds for the June FOMC meeting:

Raphael Bostic, the head of the Federal Reserve Bank of Atlanta, said he doesn’t see the need for more rate hikes. He’s been one of the more dovish members on the FOMC. It’s as if the recent rise in long-term bond yields has helped do some of the Fed’s work for it.

The market has a few hurdles to get through. Tomorrow, the Fed will release the minutes from its last meeting. This is when the Fed decided to pause on rates, but it tried to sound tough.

On Thursday, the government will release the CPI for September. Wall Street expects both core and headline inflation to have increased by 0.3% last month.

We’re also about to get some of the first earnings reports for the Q3 earnings season. The big banks usually go first. On Friday, Citigroup, JPMorgan and Wells Fargo are set to report.

SAIC Is Worth a Look

Defense stocks got a nice boost yesterday for obvious reasons. On our Buy List, we have Science Applications International (SAIC), which is a very good company. SAIC gained more than 4% yesterday and another 2% today.

Last month, SAIC said that its fiscal-Q2 earnings increased by 17% to $2.05 per share. That was well ahead of Wall Street’s consensus for $1.62 per share. This is the third quarter in a row in which SAIC has beaten the Street by more than 17%.

SAIC’s CEO Nazzic Keene said, “I am proud of the financial performance we delivered in the quarter with both strong organic-revenue growth and margin expansion. We remain on track to achieve our three-year financial targets and are off to a strong start.”

SAIC’s operating income increased 7% to $134 million. Operating margin widened by 70 basis points to 7.5%. Q2 EBITDA increased by 5% to $174 million, and EBITDA margin was 9.8%. Free cash flow was $143 million. These are solid results.

One impressive stat is that SAIC reduced its number of outstanding shares. For Q2, SAIC’s number of shares decreased from 55.9 million to 53.9 million. During the quarter, SAIC used $100 million to buy back shares and paid out $20 million in dividends.

SAIC also raised its outlook for the rest of this year. The company now sees full-year earnings coming in between $7.20 and $7.40 per share. That’s an increase of 20 cents to both ends of the previous guidance. Wall Street had been expecting $7.16 per share.

This is the second time this fiscal year that SAIC has increased its full-year guidance. The previous increase was also by 20 cents per share at both ends.

Shares of SAIC had a very nice run earlier this summer, but they had been somewhat weak lately. That is, until this week. SAIC’s next earnings report will be due out in early December. Look for more good results.

That’s all for now. I’ll have more for you in the next issue of CWS Market Review.

– Eddy

P.S. If you want more info on our ETF, you can check out the ETF’s website.

Posted by on October 10th, 2023 at 10:25 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.