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On Booking Profits and "Known Unknowns"

Zacks

Tuesday, October 9, 2018

Ahead of today’s market open, futures are once again down — now for the fourth consecutive day, going back to last week’s historically strong employment numbers, from Wednesday’s ADP private-sector payroll report to Thursday’s jobless claims to Friday’s federal government non-farm payrolls and unemployment rate. The labor market has been so hot and tightening so long, market participants now feel something has got to give.

That “something” is likely inflation creeping into the economy, from the most common culprit of inflation in any given scenario: wage growth. As jobs get harder and harder to fill, employers will be forced to offer higher wages to their workforce. In fact, we see evidence of this already — not in September’s job reports, even, but in Amazon’s AMZN announcement last week that its minimum wage employees will be earnings $15 per hour, amounting to a 50+% raise.

So if everyone sees their wages increase by 50%, corporate margins will grow slim unless prices of their goods and services are raised. And when inflation enters the market this way, the Fed creates a roadblock to the quick spread of higher and higher costs by raising interest rates so that transactional costs become more expensive. When that happens, borrowing costs go up. Welcome to the next phase of the American economy.

It’s not only wage growth and interest rates that are increasing in price these days; we also see WTI and Brent crude futures up again this morning, to $74+ and $84+ per barrel, respectively. Based on the vast number of things on which our economy relies on fossil fuel energy, oil prices also help push inflation metrics higher. To that end, we currently see oil supermajors in Zacks Rank “Buy” or “Strong Buy” territory: ExxonMobil XOM, Chevron CVX and BP BP.

We also see a new hurricane barreling up the Gulf of Mexico toward the Florida panhandle: Hurricane Michael is now increased to a Category 2 storm, with wind speeds up to 100 mph. As we saw a few weeks ago with Hurricane Florence, even in the best-case scenario these storms have a disruptive effect on regions of the economy. Of course, this current market pullback began before Michael even formed, but adding another dollop of concern to the American South may see a prolongation of investor worry in our current environment.

We’re also less than a month before midterm elections in the U.S., in a political climate that is acutely polarized. This raises the overall level of uncertainty for the markets, as in: what might a “Blue Wave” mean for Wall Street? At the very least, a changing of the congressional guard (assuming it happens, and it may not) will pull focus from the fast-track our economy has been on, more or less, since corporate tax cuts threw fuel on the fire at the start of 2018.

Don’t forget Q3 earnings reports, which will begin to hit the tape at a rapid clip beginning this Friday when JPMorgan JPM and others bring forth their latest results. We have plenty of coverage for the big banks of late, but until the numbers are announced, they amount to yet another layer of uncertainty.

And the main reason we’re still selling off recent all-time highs is because traders and investors everywhere took a look at the calendar and then saw their year-to-date returns. Now that it’s decided that even the best-case economic scenarios eventually reveal a downside, they have concluded that booking profits now is better than waiting for anything actual to befall returns. Compound this sentiment with all the “known unknowns” currently before us, and what we see is a rather healthy mindset of booking gains, nothing more.

Mark Vickery
Senior Editor

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