3 Reasons We're in No Rush to Put Capital to Work

Equities are predominantly lower today amid Iran-Israel tensions and the second day of the port strike that threatens to slow the economy and runs the risk of undoing some of the progress made on inflation. With Israel vowing retaliation in the coming days and Harold Daggett, chief of the International Longshoreman’s Association, threatening to "cripple" the economy, uncertainty is the word of the week.

While the start of October has several holdings in the portfolio flirting with potential buy points, including Dutch Bros BROS, Elevance Health ELV, and Labcorp LH, we are going to wait for the uncertainty to start clearing before making any moves with the portfolio. Our thinking is an extended port strike or a larger-than-expected retaliation by Israel and subsequent fallout will lead to better price points for us to put capital to work. That thinking has us checking technical support levels for the S&P 500 and Nasdaq Composite, which clock in near 5,541 and 17,461, respectively, roughly 2%-3% lower than current levels.

As we watch those levels, we are also keeping a close eye on the CME FedWatch Tool as this week’s PMI and jobs data roll in. So far, the market is pricing in three 25-basis point rate cuts before the end of this year. Yesterday’s mixed ISM Manufacturing PMI continued to illustrate that that part of the economy contracted in September but showed unexpected progress on inflation. When we reviewed the report, we called out that we would likely see the Atlanta Fed GDPNow model fall, and it did, hitting 2.5% from the prior forecast of 3.0%.

We've seen that pattern over the last few months, only to witness that rolling GDP forecast be revised higher as data remind us the Services part continues to drive the overall economy. Indeed, today’s September ADP Employment Change report showed service jobs adding 101,000 of the 143,000 jobs created during the month. That report also showed Construction added 26,000 in September, another positive data point for our positions in United Rentals URI, Vulcan Materials VMC, and Builders FirstSource BLDR.

That level of job creation in the Services economy led ADP’s overall September Employment Change report to come in ahead of the 120,000 consensus and far better than 103,000 in August. It also suggests the employment component in tomorrow’s September ISM Services PMI report may best market expectations. If we see that, and factor in the month-over-month increase found in ADP’s September findings, it suggests Friday’s September Employment Report may come in stronger than the 140,000 non-farm jobs expected by the market. Remember, per the Bureau of Labor Statistics, the economy added 142,000 jobs in August, 89,000 in July, and 118,000 in June.

Where we’re going with this is if we see a stronger-than-expected September jobs print on Friday, it would suggest the jobs market strengthened further during the month. On its own, that would mean the market would need to reconsider the three 25-basis point rate cuts it currently sees ahead.

Complicating things will be Israel-Iran tensions and the port strike’s potential inflationary impact, but another reason for the Fed to move slower than expected would also be another reason for us to be patient with putting capital to work.

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At the time of publication, TheStreet Pro Portfolio was long BROS, ELV, LH, URI, VMC and BLDR.