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Traders returned to Wall Street Monday kicking off the final week of a dismal month of September, with stocks opening lower as investors continue to grapple with inflation worries, rising interest rates and uncertainty in Washington. The broader S&P 500 and tech-heavy Nasdaq Composite both dipped around half a percent in early trading, building on steep declines already this month that have been the worst for both indexes since December.
Adding to market nerves is the looming threat of a government shutdown if Congress fails to pass a budget resolution by the Saturday deadline. Lawmakers ended last week without a clear path forward, increasing the chances federal agencies would have to close non-essential operations from lack of funding. “I don’t know what to think,” Senate Majority Whip Dick Durbin admitted to CNN, underscoring the political divisions preventing agreement as the clock ticks down.
A closure coming at the end of the fiscal year could significantly slow the economy just as it shows signs of weakening. Moody’s Investors Service warned in a note such an outcome would demonstrate “the significant constraints that intensifying political polarization put on fiscal policymaking.” With consumer prices up around 8% annually and the real estate market beginning to cool, further disruption in Washington could exacerbate downside risks already weighing on investor sentiment after sharp declines last month.
Against this backdrop, all eyes will be on any signs of progress toward averting a budget impasse in the Senate this week. Failure to fund the government by the deadline “would be a credit negative event for the U.S.,” according to Moody’s analysts. Meanwhile, the yield on the benchmark 10-year Treasury note climbed to 4.54% Monday morning, its highest level since 2007, reflecting concerns over economic growth given the Fed’s aggressive interest rate hiking campaign. Policymakers last week signaled they expect borrowing costs to remain elevated for some time as inflation remains stubbornly high.
Amid challenges at the macro level, corporate earnings may provide some guidance on the health of individual industries and companies. While S&P 500 profits are still forecast to decline slightly in the third quarter, estimates have improved since late June and any upside surprises could offer pockets of buying opportunities. Eight of the 11 sectors tracked by the index are projected to post year-over-year earnings growth led by Communication Services and Consumer Discretionary firms, according to FactSet.
However, the outlook beyond this reporting season is clouded by questions around how durably higher interest rates and sticky inflation will impact spending appetites. “The next two weeks will be critical in determining the directionality of the cycle & Dec Q iPhone builds/revenue,” said Morgan Stanley analyst Erik Woodring of initial demand signals for Apple’s new product lineup. Chipmakers like Nvidia and AMD also climbed Monday as one area that could see upside if seasonal demand holds up through the holidays.
In deal news, Amazon shares rose following news the e-commerce giant will invest up to $4 billion in Anthropic to accelerate advances in artificial intelligence. The startup will partner closely with Amazon Web Services to make its chatbot and customization technologies available to enterprise customers. The blockbuster investment highlights how technology heavyweights view AI as critical to future innovation and competitive positioning across industries.
Some Recommendations for Safer Stocks as Risks Persist
While sustained market volatility may persist, certain sectors and companies with stable fundamentals offer safer options for long-term investors. Some analysts point to traditional consumer staples like food, beverage and household products which tend to hold up better than discretionary spending when the economic backdrop weakens. Coca-Cola and PepsiCo rank among the bluest of blue chips with enduring demand for their ubiquitous brands worldwide.
Defensive healthcare also provides downside protection through economic cycles given the non-discretionary nature of medical treatments. pharma giants Pfizer and Johnson & Johnson look well-positioned thanks to diversified revenue streams and consistent new drug pipelines. Within healthcare facilities, UnitedHealth Group dominates managed care with 170 million medical members globally.
Among technology, certain names concentrate on necessities like cloud infrastructure, cybersecurity and semiconductor production equipment rather than discretionary markets vulnerable to slowing demand. Leaders include Microsoft, Cisco, Intel and Applied Materials with pricing power and recurrent revenue models resilient to broader fluctuations.
Meanwhile, energy and financial pay special dividends during inflationary times based on their structure. Integrated majors Chevron and ExxonMobil generate substantial free cash flow while also returning significant capital to shareholders. JPMorgan, Citi and Bank of America stand to benefit from rising interest rates as they lend. For conservative investors, focusing on the sturdiest companies across these areas may provide shelter as turbulence persists in the broader landscape.
The final weeks of 2022’s third quarter brings both challenges and possibilities for traders. Progress toward a funding deal, solid earnings results and any hints of peaking price pressures could offer much needed respite for the beleaguered stock market. But failure on any of those fronts risks deepening Wall Street’s dreadful September and prolonging uncertainty. With such a knife’s edge between optimism and pessimism, vigilance will be key through a turbulent finish to gain insight into what the last few months may ultimately portend for the overall trajectory of equities.
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