Veteran fund manager offers startling S&P 500 warning

Although this is an election year, politics isn’t the only place you can find a surprise in October.

Wall Street can be the source of many startling events this time of year when the leaves fall and the scarecrows rise.

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“October has a track record and this year is likely to have a few surprises,” says Louis Navellier, founder and chief executive of Navellier & Associates.

The Dow Jones Industrial Average is up about 12% year to date, while the S&P 500 is up 20% and the Nasdaq is up 18.3%.

However, consumers still have concerns about the economy.

Analysts writing in September’s Deloitte State of the US Consumer report said that while financial sentiment improved among higher-income households, it remained relatively flat among middle- and lower-income households from 2022.

“The stagnant sense of financial well-being could explain reduced discretionary spending intentions, as households reported focusing on non-discretionary categories and savings,” the report said.

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The analyst cites a “solid” payroll report.

“Housing spending intentions continue to rise, potentially forcing consumers to look for cost-saving opportunities in other categories,” Deloitte said.

On Oct. 4, the U.S. Labor Department said nonfarm payrolls rose 254,000 in September, up from a revised 159,000 in August and better than the Dow Jones consensus forecast of 150,000.

Related: Federal Reserve officials offer hints on what’s next for interest rates

“The nonfarm payrolls number blew away even the most optimistic estimates,” Navellier said.

“Expected to rise modestly from 142,000 in August, September came in at 254,000, the highest since May, and August’s number was revised higher to 159,000, an encouraging development after four consecutive months of lower revisions to data from the previous month,” he added.

Navellier said it was significant that the unemployment rate fell to 4.1 percent from 4.2 percent.

“While stocks have eased up, bonds have traded lower and yields have risen as hopes of an aggressive (Federal Reserve) rate cut to shore up weak employment trends they faded quickly,” he said.

“The 2-year yield exploded (more than 0.13 percentage points) and the 10-year nearly (0.1 points),” he noted. “Rising interest rates initially curbed stock market growth. Over the course of a day, the rhetoric became that the Fed’s next two rate cuts are likely to be only” 0.25 percentage points.

“This strong report increases the chances that the economy will continue to grow above trend in the coming quarter,” said Jeffrey Roach, chief economist at LPL Financial. “Our base case is that the Fed will cut by a quarter point over the next few meetings.”

Roach said hours worked fell to 34.2 in September and are trending below the pre-pandemic average, which he said is an important measure for growth and productivity forecasts.

“Furthermore, this solid payroll report validates a potential half-point cut in the (Federal Funds Rate) was completely unwarranted,” he added. “The federal funds futures market is responding accordingly. The only cautionary signal could be the rise of those with multiple jobs.”

The number of those holding multiple jobs rose to 5.3 percent, he said, noting that the last time that ratio was higher was early 2009, when the economy was in the midst of the Great Financial Crisis.

TheStreet Pro: “Extended Market Rating”

TheStreet Pro’s Chris Versace said the stock market received positive news for the economy on Oct. 4, with a tentative deal ending the port strike and the September employment report “handily beating market expectations.”

“While we enjoy the rebound effect it has on stocks closing the week as two concerns have been cleared, we must also consider that it will keep market valuation stretched on several fronts,” he he said.

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Versace discussed the current market valuation in his Oct. 2 column.

“When valuation is mentioned, a lot of people just focus on the simple price-to-earnings ratio because it’s easy or they don’t have access to the data to calculate other metrics,” he said.

“However, simple can be misleading, so we prefer to use a few different valuation metrics to make sure we have the right context.” he added. “Often, that context for both the market and individual stocks is history.”

Versace pointed to the dividend yield, which is the amount of money a company pays shareholders for owning one share of its stock divided by its current share price.

“Of the slightly over 500 constituents in the S&P 500, over 400 of them are dividend payers,” he said. “Some have better returns than others, while other companies, including our own PepsiCo (PEP) they have a growing dividend policy.”

Versace said this information allows investors to examine aggregate dividend payments for the S&P 500 and use dividend yield analysis to see if the market’s barometer is extended.

He noted the mismatch between an expensive (higher) P/E multiple and an expensive (lower) dividend yield. Conversely, he said, when a P/E is cheap (low), the market’s dividend yield will be high.

While the S&P 500’s dividend has been slightly higher recently than it was on Sept. 30, Versace said it’s still at a very low historical level.

“This adds to the view that the market is stretched at current levels and supports our near-term view of staying on the sidelines,” he said.

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