Markets Brief: Non-Farm Payrolls in the Spotlight Again

Emerging Markets Boosted by China’s Recovery

China roared back into the spotlight last week. The Morningstar China Index rose 13.7% following the government’s announcement of a massive stimulus package, including 800 billion Chinese yuan ($114 billion) in support for equity markets. Since the index’s market capitalization is $2 trillion, this is a significant injection, designed to overcome the pessimism that has dogged this market over the last few years. The impact of this move was also seen in the Morningstar Emerging Market Index, which rose 5.5% over the week.

Closer to home, the effect of the Chinese stimulus on the Morningstar US Market Index (up 0.6%) was primarily seen through the basic materials sector, which rose 3.2% on expectations of an increase in demand for industrial metals in China. You can find out more on Morningstar’s new markets page.

Market Volatility Can Be Challenging

As a result of these moves, the Chinese market is now ahead of the US market over the year to date—21.9% compared with 20.5%. This reminds us that returns from investing in undervalued securities can be lumpy. When modeling future returns, it is natural to forecast a gradual move from the current price toward the asset’s fair value. However, these moves can be abrupt, creating behavioral challenges. While we are more familiar with these challenges when an asset’s price falls, it is equally relevant when it rises.

It is always tempting to sell an asset when it has risen swiftly. This neglects how, having sold an investment, one must find a replacement or accept the returns from holding cash. Selling decisions should be driven by the same factor as buying decisions: the relationship between the asset’s price and its fair value. An asset’s price rising sharply doesn’t make it unattractive if it remains below or near its fair value.

Chinese Stocks Still Undervalued

Despite the recent price rise, Chinese equities remain significantly undervalued, in the view of Morningstar’s equity analysts. They could consequently continue to deliver above-average returns over the long term. However, don’t expect these returns to be smooth! To learn more about Morningstar’s global equity valuations check out our Global Market Barometer.

Bond Yields Normalize

Two-year Treasury bond yields fell sharply on Friday, as investors have become more optimistic about the potential for future interest rate cuts since the release of the latest PCE inflation report, which was a little lower than expected. The interest premium investors receive for holding 10-year government bonds over two-year bonds increased to 0.18%. This may appear insignificant, but it reflects a further normalization of the relationship between shorter- and longer-term interest rates and a better investing environment with fewer distortions. Morningstar chief markets editor Tom Lauricella explains more about the inflation report.

All Eyes on US Jobs

New US employment data, in the form of the non-farm payrolls on Friday, will likely take center stage this week. The unemployment rate is expected to hold steady at 4.2%. A number significantly greater than this would likely spark concerns about a recession and deeper cuts to interest rates. You can see more of what’s happening this week on our Market Calendar.

Highlights of This Week’s Market and Investing Events

• Monday, Sept. 30: Chicago PMI
• Tuesday, Oct. 1: Construction Spending, ISM Manufacturing, Job Openings and Labor Turnover Survey, earnings from Nike NKE
• Wednesday, Oct. 2: ADP Employment Survey
• Thursday, Oct. 3: Initial Unemployment Insurance Claims, ISM Services PMI
• Friday, Oct. 4: Employment Situation Report

Check out our full weekly calendar of economic reports, consensus forecasts, and corporate earnings.

For the Trading Week Ended Sept. 27

• The Morningstar US Market Index rose 0.61%.
• The best-performing sectors were basic materials, up 3.17%, and consumer cyclical, up 2.20%.
• The worst-performing sector was healthcare, down 1.20%.
• Yield on the 10-year US Treasury notes rose to 3.75% from 3.73%.
• West Texas Intermediate crude prices dropped 5.69% to $68.57 per barrel.
• Of the 703 US-listed companies covered by Morningstar, 427, or 61%, were up, five were unchanged, and 276, or 39%, were down.

What Stocks Are Up?

Wynn Resorts WYNN, Las Vegas Sands LVS, Micron Technology MU, Estee Lauder Companies EL, Plug Power PLUG

Best-Performing Stocks of the Week

What Stocks Are Down?

Light & Wonder LNW, Bread Financial BFH, Weatherford International WFRD, Medpace Holdings MEDP, Hawaiian Electric Industries HE

Worst-Performing Stocks of the Week