For reasons that are not fully understood, September has historically been the worst month for stocks, according to the average S&P 500 return for each month (St. Louis Federal Reserve dating back to 1970).
Historically, stocks turnaround in October, and the remainder of the year is favorable for investors. So far, markets have not deviated from the pattern.
What led to the rebound in October, a rebound that fueled the best monthly rise in the Dow since 1976, according to Barron’s?
Bear market rallies are not uncommon. Following the steep decline in September, it’s not unusual for overly negative sentiment and oversold conditions to lead to a bounce, as we saw in June and into August.
The mirror image would be a pullback in a bull market, when excessive speculation and bullish sentiment can lead to a short-term downdraft.
But October’s strong rally was not simply technical in nature. As we saw when second quarter earnings were reported, profits for most S&P 500 firms are coming in ahead of low expectations, according to Refinitiv. Our very own Dr. Bowlin would also agree with the assessment on earnings for the third quarter.
In other words, we didn’t see the earnings apocalypse that some had feared. But there were some high-profile exceptions.
Reports from Amazon (AMZN), Microsoft (MSFT), Alphabet (Google, GOOG), and Meta Platforms (Facebook, META), are a ‘boots on the ground’ review of what’s happening in some sectors of the global economy. Profit misses and/or a disappointing outlook hit shares hard.
Finally, the U.S. Federal Reserve raised interest rates November 2 by 75 basis points for the fourth straight meeting while hinting at a potential slower pace in the future — and then Fed Chair Jerome Powell reiterated the central bank’s commitment to tame multi-decade highs in inflation. Four 75-basis-point rate hikes in a row is unprecedented since the Fed explicitly started targeting the federal funds rate to conduct monetary policy in the late 1980s. Wednesday’s announcement brings the rate to a level not seen since the end of 2007. The vote was unanimous.
They don’t expect near-term rate cuts. Instead, some Fed officials may begin to argue that the Fed should slow the pace and possibly stop hiking rates early next year, as they assess the impact of recent policy actions.
The Federal Reserve is maintaining its tough anti-inflation rhetoric but hints at a more flexible position amid rising economic uncertainty. The Conference Board’s Leading Index, the housing market, and the inverted yield on the 10-year/3-month T-bill (the 3-month rate is higher than the 10-year yield) suggest a recession is unavoidable, probably next year.
Investors are anticipating some shift going forward, and it contributed to last month’s rally. But any adjustment in policy could quickly fall by the wayside with another disappointing inflation number.
The general economic fundamentals have yet to noticeably shift. Just as low rates, low inflation, and record corporate profits helped drive equities higher during the 2010s, today’s high inflation and high-rate environment has led to a bear market. We will get the inflation report (CPI) on November 10. The election will be behind us (maybe not all results!) and the next inflation report will be December 13. This data will give the Federal Reserve the information they need to determine if the rate hikes are working or not.
But investors attempt to sniff out new trends. It would be highly unusual for investors to wait for the all-clear sign before piling into stocks.
That said, bull markets follow bear markets. Historically, the major indexes have reclaimed their former highs.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.