SCHX - September Jobs Blowout: Yields Spike Stocks Fall SCHX A Buy Into Year-End

2023-10-06 09:36:20 ET

Summary

• September job creation exceeded expectations with 336,000 jobs added, the largest gain since January.
• The unemployment rate remained unchanged at 3.8% and average hourly earnings rose 4.2% from last year.
• Treasury yields surged and equity futures dropped after the strong employment report, while the dollar rises and crude oil declined.
• Despite the negative equity market reaction, stocks now enter a bullish seasonal phase.

A whopping 336,000 jobs were created in September, much stronger than the +170,000 expectation, and the biggest gain since January. Once again, the ADP report for last month proved to be a false flag. Private payrolls also jumped by 263,000. Importantly, and reversing the previous trend, two-month revisions were to the good side by 119,000. In all, it was a blowout NFP report for September, much to the chagrin of the Fed.

The unemployment rate was unchanged at 3.8%, and average hourly earnings also were the same as in August, up 4.2% from year-ago levels and a tick softer than the consensus. Month-over-month average hourly earnings were up just 0.2%, the lightest since February 2022, and actually under what economists were expecting. The average work week was in-line with forecasts at 34.4 hours as the labor force participation rate was unchanged at 62.8%. Finally, the U6 underemployment rate ticked down to 7.0%.

September Jobs Nearly Double Expectations

UR Unchanged, Total Payrolls Rise In September

With no Wall Street forecasters expecting anything close to the headline NFP number, Treasury yields surged immediately after the labor market report crossed the tape. The benchmark 10-year rate jumped to 4.89% while the 2-year yield jolted higher by 11 basis points. Real yields also surged, with the 10-year inflation-adjusted rate handily topping 2.5%. Despite the steep jump across the curve, rates are not far from where they were at the highs on Thursday. The widely-followed 2s10s yield spread narrowed to its tightest level of 2023, near -25 basis points.

10-Year Treasury Yield Spikes Above 4.8% Post-NFP

Equity futures dropped about 1% from levels immediately in advance of the data release. The dollar rose 0.5% and crude oil fell. Looking ahead post-NFP, the Fed Funds futures market further pushed out the first rate cut from July to September 2024.

The silver lining here is seen in average hourly earnings on an annual basis which, at 4.15%, is the slowest rise since June 2021.

Hourly Earnings Continues To Moderate

Following the hot employment report and more signs of 5% rates sticking around for a while, where do we stand with the state of the US stock market? Are equities expensive here or has the nearly 10% correction been sufficient to shake out the weak hands? Let’s dig into where US large caps may go as year-end approaches through the Schwab U.S. Large-Cap ETF ( SCHX ).

According to the issuer , the objective of SCHX is to track as closely as possible, before fees and expenses, the total return of the Dow Jones U.S. Large-Cap Total Stock Market Index. The fund can be a tax-efficient option and a core component of a diversified portfolio, providing access to the 750 largest US companies by market capitalization and potential long-term growth for investors. Back in July , I was uneasy about the stock market situation given some bearish seasonal trends after a hot first half. Today, I'm upgrading SCHX to a buy as a much-needed correction may be wrapping up ahead of the often-bullish mid-October to year-end period.

SCHX is a large ETF with more than $32 billion in assets under management and it has paid a trailing 12-month dividend yield of 1.54%. With an exceptionally low annual expense ratio of just three basis points, the fund earns a strong A+ rating for fees. Later on, I will detail how momentum has weakened from strong levels earlier this year. For now, the fund has a strong liquidity rating as its average trading volume over the last 90 days is north of 1.5 million shares, and the ETF’s 30-day bid/ask spread is tight at just two basis points.

SCHX: Portfolio Breakdown and Dividend Information

With a weighted-average market cap of $636 billion as of June 30, 2023, per Schwab, the fund’s GAAP price-to-earnings ratio is above 23. The operating earnings multiple is closer to 17 using the latest data. Considering that the very largest companies generate much of the market’s growth, the P/E ratio differences among market cap sizes are partially justified. I still assert, though, that SMID caps should not be abandoned given dismal sentiment and depressed absolute valuations.

US Stock Market Valuation Pulling Back, Large-Cap Premium Persists

Seasonally, early October is an opportune time to be long and even overweight the broad US stock market, according to data from Equity Clock . The Q4 rally often does not begin until we see some October volatility beforehand, and that has played out so far. Thus, there are seasonal tailwinds that should favor the bulls. I used the Russell 1000 US large-cap index ETF as a proxy for SCHX in the graph below.

US Stocks Typically Rise From Mid-October Through Early January

The Technical Take

Large-cap US equities are at a critical juncture as we approach the all-important Q3 earnings season. Notice in the chart below that SCHX has pulled back about 8% from the late July peak. Weakness has been seen among smaller stocks, so SCHX’s holdings beyond just the S&P 500 have been a modest soft spot on a relative basis. I see the current price area as key support.

Take a look at the rising long-term 200-day moving average – shares met some buyers in recent days on an approach to that trend indicator line. Heavy selling lately has also resulted in technical oversold conditions, with the RSI momentum gauge at the top of the graph dipping under 30 for the first time since October of last year. A bearish breakdown under $49 on SCHX may lead to next support just above $44 and would threaten the overall bullish rounded bottom pattern that played out over 2022 and the first seven months of this year.

SCHX: US Stock Market Hangs Near Key Support

The Bottom Line

I'm upgrading SCHX to a buy rating. I assert that the jobs market is cooling sufficiently for the Fed to ease on its tightening path. Moreover, seasonality and technicals support the thesis of a year-end rally.

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