Four Reasons We Believe Stocks Won’t Crash in October Posted on October 10, 2023 “October: This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February.” -Mark Twain October is known for many things, from sweaters, to leaves on the ground, to the World Series, to pumpkins, and yes, to market crashes. It is also my birthday month, but for today’s blog, we will focus on why we believe there won’t be another October market crash. Stocks have had a rough go of things since the late July peak. As we’ve noted many times, the past few months shouldn’t have come as much of a surprise, given the third quarter tends to be a time investors pause to catch their breath. Now we are hearing more and more that another October market crash is around the corner. Higher yields, a hotter economy, geopolitical worries, and the possibility of more rate hikes, are all adding to the near-term worries. Think about it. Some of the most spectacular crashes in history took place during in October. 1929 and 1987 stand out, but 2008 was another horrible October. The worst month ever was a 31% drop in September 1931, highlighting that the fall months in general can be quite tricky. Here’s the thing though — I think October gets a bad rap, as it’s not so much a ‘bad’ month as a month of high volatility. Since 1950, the S&P Index has been up about 1% on average in October which ranks as the 7th best month of the year, not all that bad. It also ranks as the 3rd best month the past decade and 4th best the past 20 years. Pre-election years aren’t that great, but overall October has historically not been as bad as the media makes it sound. How can this be? Well, positive average returns with such large declines means October has also had some huge gains. October gained 16% in 1974, 11% in 1982, and 11% in 2011. The bottom line is if you are looking for a crash this month simply because it has had a few crashes in the past, we think you’ll be quite disappointed. Here are four reasons we don’t think we will see an October crash in 2023. Stocks Are Oversold First, stocks are quite oversold on many levels. Yes, most crashes took place from oversold levels, but with the economy as strong as it is, as Sonu discussed last week, we think the odds of a crash are very low. The majority of the time stocks are oversold we’ve been closer to a major low rather than close to a crash. Last week, for example, saw less than 10% of the components in the S&P 500 above their 50-day moving average, a sign of extreme oversold levels. Although this signal didn’t work well in 2007/2008 or right before COVID, the majority of the other times we were close to a major low. Given we don’t think we are in the middle of another generational financial crisis or once in a century pandemic, now could be closer to a major low than most think. Stocks Tend To Bottom In October Second, including last year’s bear market, 7 of the past 18 bear markets ended in October. Our friends at Bespoke reported that out of 60 corrections since 1945 (declines of 10% or more), 18 of them ended in October. The bottom line is we are much more likely to see a major low take place in October than a market crash, and we think this year will be another major low. Also, looking at the past 10 pre-election years, stocks tend to bottom around now, right before an end-of-year rally. A major sell-off from here would be quite out of the ordinary. A Weak September = A Better October Third, September is historically a bad month for stocks and when the first half of the month is down big, the second half tends to do even worse. That sure played out this year. Here’s some good news. When the S&P 500 falls more than 3% in September, but is still higher for the year going into October, a bounce is quite likely. October has gained five out of six times when we’ve seen this and stocks have never been lower in the fourth quarter, with the average return in October and the fourth quarter both up substantially. Fear Is Everywhere Fourth, if everyone has already sold, then only buyers are left. Think about one year ago. Things felt horrible, but that is a classic time for a bear market to bottom. We think we are near a peak in negative sentiment, which could be another clue stocks won’t crash in October. One sentiment indicator we watch is the put/call ratio. On Wednesday of last week, we saw a huge spike in the CBOE Composite put/call ratio, one of the largest spikes ever going back two decades. That’s a lot of fear. Here’s some examples of when we’ve seen the CBOE Composite put/call ratio spike above 1.5 since 2010. As you can see, this is quite a rare signal, but also very bullish, as stocks have never been lower a year later and in fact have averaged more than 20% higher. Here’s the same data, but overlayed on the S&P 500. Again, these signals have tended to come near significant market lows. The McRib Is Back Here’s a bonus reason we believe stocks won’t crash, and of course this one is meant to be fun. It turns out stocks do much better when the McRib is being sold. Given McDonald’s just brought it back (when they said it was gone forever), this could be another reason stocks can surprise higher in October. Thanks to my friend Nick Maggiulli for this one. Wrapping It All Up Yes, there is a lot of fear out there, but there’s an old saying that the market climbs a wall of worry. In late July, after one of the best starts to a year ever, there wasn’t a lot of worry out there. Now after seasonal weakness there are many worries building up. Given the economy remains on strong footing, we continue to expect stocks to make a major low soon and we believe we will likely see a nice fourth quarter rally.
Bulls Pile Back In Thu, Oct 12, 2023 The S&P 500 has been in rebound mode over the past week, having now rallied 3.45% off the October 3rd low. In turn, sentiment has taken a distinguished bullish turn to start out the month of October. That compares to last month when sentiment took a more bearish tone as we discussed in Tuesday's Closer. On top of a 2.2 percentage point increase in bullish sentiment last week, this week saw the percentage of respondents to the AAII survey climb another 9.9 percentage points. That brings bulls up to 40%, the highest since the first week of September, and back above the historical average (37.5%). Bearish sentiment saw a corresponding pivot lower. Bears are now down to 36.5% versus the recent high of 41.6% last week. While that is only the lowest level since the week of September 21st, it was the largest week-over-week drop since June 8th. Additionally, that decline has not been enough to bring bearish sentiment back to normal levels as it is still 5.43 percentage points above the historical average. That has resulted in the bull-bear spread tipping back into positive territory for the first time in a month. Of course, the drop in bearish sentiment was not nearly as large as the increase in bullish sentiment. That was because there was a notable decline in neutral sentiment. That share of respondents reporting that they expect unchanged prices fell by 4.8 percentage points this week. Not only was that the fourth week-over-week decline in a row, but it was also the biggest one-week decline since July. Now at 23.5%, neutral sentiment registered its smallest share in just under one year.
The Bull Market Turns One Posted on October 12, 2023 “There are no gains without pains.” – Benjamin Franklin Hard to believe it, but one year ago today the vicious bear market ended. I remember it well, as the bear market saw the S&P 500 down 25.5% from the early January lows at the close on October 12, 2022. The very next day we saw the hotter-than-expected CPI print and futures tanked on the news. It felt like all hope was lost. Then a funny thing happened. Stocks soared and closed up 2.60% on that day, more than 5% off their intraday low. That was the ultimate capitulation that was necessary to end the bear market. As Mr. Franklin said above, there were a lot of pains, so some gains were due. In fact, I joined Yahoo! Finance right after this huge reversal and talked about why October was a bear market killer and we were likely near a major low. If this sounds somewhat familiar it is because we saw stocks tank last Friday on the hotter-than-expected employment report. That’s right, our economy creating 336,000 jobs was somehow a bad thing. This number was way more than any economist expected and to us, it put an end to the silly talk about an imminent recession. Although futures tanked on Friday, by the end of the day stocks were firmly in the green, which was followed up by more gains on Monday and Tuesday. Could we have just had another major low in October? We think the odds do favor it. So, let’s talk about bull markets. At the one-year mark this time the S&P 500 is up more than 21%, which would put it at one of the weakest first years of a new bull market ever. In fact, the average first year has seen stocks gain nearly 39%. What is going on this time? For starters, as we’ve said repeatedly, we don’t see a recession on the horizon, as the economy is on much better footing than most economists claim. If we can avoid a recession next year (no small feat for an election year), then there’s a good chance for more solid gains in 2024. In fact, this was the worst first year to start a bull market since after the 1987 bear market, gaining ”only” 21.4% that first year. The good news? The second year of that bull market was the strongest on record, up 29.0%. Could we see another outsized gain after modest gains this first year? We wouldn’t want to bet against it. One more interesting note about next year—it’s the fourth year of the Presidential cycle, otherwise known as an election year. Historically, stocks gain 7.3% during election years, better than only the mid-term year in the four-year cycle, which averages 6.0%. (The first year of a Presidential term tends to be the best for stocks.) But what you need to know about an election year is the returns are much better when there’s a first-term President in office, up 12.2% on average and higher 10 out of 10 times since 1950. In fact, returns are actually slightly negative under a second term President in an election year, thanks to the 10.1% drop the lame duck year of President Clinton (2000) and the 38.5% drop the lame duck year of President George W. Bush (2008). Buckle up, as we head into the election year there could be many new worries and concerns, but we remain optimistic that this bull market has plenty of life left supported by an economy showing no real signs of breaking down.
Why We Believe the Inflation Report Was Better Than What the Headlines Suggest Sticking with energy for a moment, the good news is that gas prices are falling and that’s going to drive the October CPI data lower. Gas prices are falling despite a recent run-up in oil prices because refining margins are crashing (I wrote about this earlier this month). The other big category that matters for consumers is food prices. Grocery store inflation has eased from an annualized pace of 6% last December to 1.7% in September. That’s going to be key in keeping inflation lower as we move forward, not to mention providing a boost to households. There’s Good News Even Within Core Inflation Core inflation, which excludes food and energy prices (since they’re more volatile), rose 0.3% in September and is running at a 3.1% annualized pace over the last three months. That’s slightly hotter than in August but as you can see below, it’s still in an encouraging downtrend. The rebound in September was because of a surprise jump in housing inflation. Housing makes up about 42% of the core CPI “basket” and is almost entirely based on rents. It has nothing to do with home prices, as even homeowners are assumed to rent to themselves at prevailing rental prices. Housing inflation ran at an average annual pace of 5.9% from February through August. That jumped to 6.9% in September. This is likely to be a blip in an otherwise strong downtrend, and we’ll probably see it reverse over the next month or two. Data from Apartment List shows that market rents have been falling for a few months now. Official data has a long lag to market data, but it does eventually follow it. So, we should see continued disinflation in the housing inflation data. The most encouraging part of the CPI report was the fact that everything outside of housing offset the pickup there. Prices for commodities outside of food and energy fell for the 4th straight month, including Used cars and trucks: -2.5% month-over-month Apparel: -0.8% Household furnishings and supplies: -0.3% Even several services categories are seeing disinflation. The Fed is especially focused on services outside of housing because they believe strong wage growth can lead to people spending more on services and driving those prices higher. The good news is that we’re not seeing that happening. For one thing, wage growth has eased to the pre-pandemic pace of about 3.4% – make no mistake, that’s still strong but consistent with 2% inflation as was the case before the pandemic. And we’re seeing evidence in the inflation data. The chart below shows inflation for a few select categories, which together make up just over a fifth of the core CPI basket – comparing the 3-month annualized pace in September to the pace last December, and the pre-pandemic trend. You can see how the latest bars in green are much closer to the pre-pandemic trend (in blue), and well below the red-hot pace we saw last December. The big takeaway from the CPI data is that there is no structural reason for inflation to surprise higher, or even remain elevated, for much longer. Despite the headlines, this was a good report because it showed continued normalization of inflation under the hood. Certain categories offset others and in a very good way. Unlike last year, we know that the following dynamics are in place and should remain so for the next several months: The reversal in vehicle inflation Housing disinflation Normalization of wage growth to the pre-pandemic pace, which eases pressure on services inflation As a result, we believe the Federal Reserve is done with interest rate hikes for this cycle. They’ve already done more than enough. That could be a potential tailwind for equities as the bull market that started a year ago begins its second year, which Ryan just wrote about. Also check out our latest Take 5 video where we talk about markets, energy prices, and the Fed.
October Historically A Good Time To Buy “Buy in October and get your portfolio sober.” Octoberphobia strikes again but fear not. Our Tactical Seasonal MACD Buy signal has triggered. Market seasonality has turned bullish, and October has historically been a good time to buy. Our bullish outlook for Q4 remains intact. The market’s pullback/correction has most likely run its course, the seasonal low is likely in, and the market is poised to begin a new trend higher. Weakness can be considered an opportunity to accumulate new long positions for the “Best Months.” NASDAQ’s Yearend Rally Since 1971, there has always been a NASDAQ Yearend Rally and its average advance has been 14.7%. We define the Yearend Rally as the gain from NASDAQ’s September or October closing low through its high in November or December. NASDAQ’s best Yearend rally was an amazing 54.5% in 1998. And even when we review NASDAQ’s performance from the same September or October low through the last day of the year, NASDAQ has been nearly as strong, advancing 94.2% of the time with an average gain of 11.1%. And none of the three losses occurred in a pre-election year like 2023!
NASDAQ’s Q4 Rally From October’s Low Yesterday we posted NASDAQ’s Q4 Rally from the Sep/Oct Low. This year we have hit the low in October, so here are NASDAQ’s Q4 Rally stat’s from October lows. Since 1971, there has been a NASDAQ Yearend Rally 98.1% of the time, and its average advance has been 13.1%. We define the Yearend Rally here as the gain from NASDAQ’s October closing low through its high in November or December. NASDAQ’s best Yearend rally was an amazing 54.5% in 1998. And even when we review NASDAQ’s performance from the same October low through the last day of the year, NASDAQ has been nearly as strong, advancing 46 of 52 years or 88.5% of the time with an average gain of 9.5%. Only one (2007) of the six losses was a pre-election year. Buy in October, and Get Your Portfolio Sober Octoberphobia strikes again but fear not. Our Tactical Seasonal MACD Buy signal has triggered. Market seasonality has turned bullish, and October has historically been a good time to buy. Our bullish outlook for Q4 remains intact. The market’s pullback/correction has most likely run its course, the seasonal low is in, and the market is likely to begin a new trend higher. Weakness can be considered an opportunity to accumulate new long positions for the “Best Months.”
November Almanac: Historically a Top Month, But Softer in Pre-Election Years November begins the “Best Six Months” for the DJIA and S&P 500, and the “Best Eight Months” for NASDAQ. Small caps come into favor during November, but don’t really take off until the last two weeks of the year. November is the number-two DJIA and NASDAQ (since 1971) month. November is best for S&P 500 (since 1950), Russell 1000 (since 1979), and Russell 2000 (since 1979). Average performance in all year ranges from 1.7% from DJIA and S&P 500 to a solid 2.3% by Russell 2000. In pre-election years, November’s performance is noticeably weaker. DJIA has advanced in 10 of the last 18 pre-election years since 1950 with an average gain of 0.5%. S&P 500 has been up in 11 of the past 18 pre-election years, also gaining on average a rather paltry 0.5%. Small-caps and techs perform better with Russell 2000 climbing in 7 of the past 11 pre-election years, averaging 1.4%. NASDAQ has been up in 8 of the last 13 pre-election year Novembers with an average 1.2% gain. Contributing to pre-election year November’s weaker performance are sizable declines in 1987, 1991 and 2007.
Late October Low Lines Up I’ve been banging my seasonal weakness drum through Q3 warning of Octoberphobia, volatility, late-October lows and turnarounds. Today’s negative action aligns with that narrative. Best Six Months start next week. Rising 10-year yields, some notable earnings season misses and turmoil in the Mideast have conspired with seasonal weakness to knock the market down. But at least we now have a Speaker of the House.
10 Things You Might Not Know, but Should “It’s not what you look at that matters, it’s what you see.” -Henry David Thoreau (writer) Here are a few things that caught my attention the past week or so. A few I’m guessing a lot of people don’t even know, but they should. Profit Margins Are Increasing One of the more obvious things we’ve been told would happen all year was that profit margins would be pressured lower. Well, you might be surprised to know that profits margins have held firm and forward 12-month profit margins on the S&P 500 are trending higher. Just like everyone said. Earnings Should Hit An All-Time High Next Year Yes, earnings have been lower year-over-year the past three quarters, but there’s a good chance that ends this quarter. What might surprise most investors is forward 12-month S&P 500 earnings are expected to hit a new all-time high next year, as the next few quarters should see solid growth. We’ve long been in the camp there is no recession coming and we still feel the odds of one in 2024 are quite low (more on that below), which should support solid earnings growth. Student Loan Payments Coming Back Could Crush the Consumer Yes, many suspended student loan payments have resumed, but this doesn’t mean the consumer will stop spending. In fact, if you look at the actual data and not the fear-mongering in the media, we see that some continued to pay their debt this whole time, while if you are struggling to pay now, the government has many ways to help. The bottom line is that despite student loan payments starting again, we’ve seen virtually no slowdown in spending. In fact, in some cases, we’ve seen more spending. Here’s what Visa’s CFO, Vasant M Prabhu, had to say yesterday at their earnings call: “As we said consistently, we’re not economic forecasters, and so at a macro level, we are assuming no recession in our outlook. We’re also not factoring in any impact from student loan repayments because…we’ve yet to see any meaningful impact.” Lastly, here’s retail and food sales running 5% above pre-pandemic levels and showing no signs of slowing down. Manufacturing Is Solid We’ve heard time and time again how poor many of the manufacturing sentiment surveys have been, suggesting a meaningful slowdown. Well, once again, a simple look at the actual hard data (versus survey data which is called soft data) shows a much different story. Would you believe that manufacturing is up 2.1% this year? If all you followed was the headlines and media, you’d never realize this. Now, to be clear it isn’t like up 2.1% is soaring, but it still paints a better picture than what we’ve been hearing and one that we expect will continue to improve over the coming quarters. No, A Recession Isn’t Around the Corner Several big names out there are still calling for a recession, but the data doesn’t confirm that at all. Of course, this might sound like a broken record, as we’ve been hearing this for a year now. The National Bureau of Economic Research (NBER) is the group that oversees calling recessions. Turns out, they don’t just look at GDP, which explains why we didn’t have a recession at the beginning of last year, even with consecutive negative GDP prints. They instead focus on things like employment, industrial production, consumption, income, and wholesale and retail sales. Looking at the six indicators they use for a recession shows we are clearly not in a recession, not even close. Employment and incomes are a tad below pre-pandemic levels, but we’ve seen surges in industrial production and retail sales. Stocks Can Go Lower, but They Can Also Go Higher After the best first six months to a year ever for the Nasdaq and the best first seven months for the S&P 500 since 1997, stocks have seen what we consider to be normal seasonal weakness. But for some reason this has confused many investors. It isn’t fun, but to see weakness in August and September isn’t abnormal. But stocks tend to do much better near the end of October. Here’s a table I’ve shared many times and it has played out quite well this year. It shows the return 10-days after a particular day. All those reds boxes in August and September fit with what we experienced this year, along with the early parts of October. Well, the good news is some of the very best 10-day returns of the year are coming up now and again over the next two months. Don’t give up hope for a fourth-quarter rally just yet. No New Highs Could Be a Good Thing Our friends at Day Hagan Asset Management tweeted this interesting stat out and I wanted to make sure you saw it. They found that years the S&P 500 didn’t make a new high (like 2023 potentially) saw big jumps the following year, up a median return of 13.1%, while years with more than 35 new highs saw a median return of only 5.8% the following year. Bears Are Back in Town Several big names are back in the news calling for a recession. Bill Gross (the founder of bond giant PIMCO) was in the news just this week calling for a recession by the end of the year. We already shared above how that simply isn’t likely, but the point I want to make is to never follow any one person blindly. Mr. Gross also called for the ‘death of the cult of equities’ back in the middle of 2012, right before stocks doubled the following seven years as you can see here. The Consumer Is in Really Good Shape One of the reasons we haven’t had a recession in the face of higher interest rates and still elevated inflation is people are worth more. If you owned a house or had stocks in the last decade, you’ve seen your net wealth increase, in many cases substantially. Things aren’t perfect, but for some reason, many economists ignored the impact of wealth on the whole equation of how the economy would do. For more on this important concept, be sure to read the blog Sonu Varghese, VP, Global Macro Strategy, wrote yesterday in Here’s Why the Economy Has Defied Recession Forecasts. Here’s a nice table that shows how net worth has increased widely across the board, but this decade it has actually been the lower earners that saw the largest jumps in wealth. That is something you sure won’t hear in the media. Lastly, the Fed found that household net worth increased by 37% in the past three years, the fastest pace since they started tracking this data. Monday Isn’t That Bad Last one is… Did you know stocks just had a 15-day win streak on Monday? That’s right, the S&P 500 was higher 15 Mondays in a row! I’m not sure what in the world it means, but only a 22-day Friday win streak in 1955 saw a longer win streak for any specific day of the week. Conclusion So, there you go, some things you might not have known, but should. I even made it through this whole blog without pointing out that Michigan is just a bunch of cheaters! But we all knew that already, so nothing new there really To me, the bottom line remains things aren’t as bad as we keep hearing. Yes, we have many legitimate worries and concerns, but the odds of a recession are quite low, the Fed is likely done hiking, profits should remain strong, and the consumer is healthy. Those aren’t the worst pillars for investors as we move into 2024.
The Energizer Bunny Economy and What Comes Next You just can’t put this economy down. There are expectations and then there’s reality. Earlier this year, expectations were for a “mild recession” in the second half of 2023, and then that got revised to a more optimistic outlook as time went by (and data came through). On the eve of the third quarter GDP release, expectations for growth had risen as high as 3.8%. The actual reading blew past those expectations, with the economy growing 4.9% in Q3. That’s after adjusting for inflation. Sit with this: Real GDP growth has grown faster than what the Congressional Budget Office (CBO) projected just before the pandemic, in January 2020. They also projected that the unemployment rate in 2023 will be 4.4%. It’s at 3.8% now. It’s important to keep perspective as well, because the economy has grown more than expected (in real terms) in the face of 3 massive shocks: A worldwide pandemic that killed millions of people, resulting in massive job losses and businesses going under. An energy price shock that sent inflation to the highest level in 40 years. Historically, energy shocks have pushed the U.S. into a recession, but not this time. The most aggressive Fed tightening cycle since the early 1980s. Surging interest rates crushed the housing market in 2022, which was not unexpected. Historically, housing downturns have preceded recessions, but not this time. Keep in mind that the trajectory of economic growth was not a given, considering the scale of the shocks. In fact, most other developed market economies have seen economic scarring from Covid and its aftermath, with significant output loss relative to pre-pandemic expectations. The US is the odd one out, with output running above pre-pandemic expectations. Even better, the inflation trajectory in the US is a lot better than in most other places. Despite pushing a lot more fiscal stimulus into the economy, inflation in the US is now running below a lot of other developed economies. The chart below shows core inflation – excluding food, energy, and owners’ equivalent rent – enabling cross-country comparisons. So, What Comes Next? A big reason for GDP growth coming in close to 5% in Q3 was because businesses rebuilt their stock of inventories – it added 1.3 percentage points to the headline number. But inventories (along with net exports) can be volatile from quarter to quarter. It helps to expand the horizon a bit. What’s incredible is that the economy has grown faster than the 2017-2019 pace of 2.8%. Over the last year, it’s grown 2.9%, and over the last two quarters, it’s grown 3.5% (all in real terms). That should give you an idea of the current underlying speed of the economy. Powering this are two major components that make up just over 60% of the economy, which should help us think about what could come ahead. Services consumption (45% of the economy) is running ahead of its pre-pandemic pace. Government spending (17% of the economy) is also running strong on the back of federal government nondefense and defense spending and investment, as well as state and local government spending. More recently, housing has also gone from being a massive drag on the economy to a slightly positive contributor. Residential investment contributed to GDP growth in Q3 for the first time in 10 quarters. Incredibly, that’s come in the face of mortgage rates north of 8%. What’s happening is that high mortgage rates are locking a lot of homeowners in their homes, so the inventory of existing homes is low. That’s pushing a lot of potential homebuyers into the new homes market, boosting single-family housing construction. In any case, this dynamic is likely to continue and even if housing doesn’t contribute a lot to GDP going forward, it’s unlikely to drag on the economy as much as it did in 2022. Coming Next for the Big Two: Services Spending and Government Spending. Stronger spending is a direct result of stronger incomes across all workers in the economy. Overall income growth is running around 5% right now, thanks to strong employment gains, strong hourly wage growth, and hours worked running similar to what it was pre-pandemic. Plus, as I pointed out in a prior blog, household balance sheets are in good shape. Median net worth rose 37% between 2019 and 2022. So, households feel less urgency to save and solidify their balance sheets, unlike what happened after the stock market and housing crash in 2008. Yet another tailwind: gas prices are falling. Nationwide average gas prices have fallen from about $3.90 a gallon to $3.50. Food inflation is also easing. That’s going to be a boost for household wallets. With respect to government spending, it’s unlikely more money for nondefense gets authorized by Congress given the political makeup. However, there’s plenty left in the tank within the Bipartisan Infrastructure Act, CHIPS Act, and IRA – only a fraction of the spending authority given by Congress has been exercised to date. There’s more to come. Defense spending rose at an annualized pace of 8% in Q3, the fastest pace since 2020 Q4. Defense spending is currently just 3.6% of GDP, close to an all-time low. It’s likely this will move higher going forward. State and local governments spending makes up 11% of the economy, which is significant. They cut back significantly between 2020 and 2022, in preparation for a storm. But they’re starting to ramp up spending and investment, and this likely to continue over the next few quarters. Sales taxes and property taxes are likely to remain strong if spending remains strong (likely if we avoid a recession, as we expect), and we avoid a housing market crash (also likely given demand dynamics). This is in sharp contrast to the post-Financial Crisis period when states struggled and cut back on spending for several years. What Does This Mean For the Fed? There are two key pieces to how this data matters for the Fed. Economic strength solidifies the idea of higher for longer. That’s likely to continue until we see some softness in the data, which is coming given the torrid pace of growth in Q3 is unlikely to continue. However, slower inflation will probably stay their hand from raising rates further. Core inflation, as measured by the personal consumption expenditures index, clocked in at 2.4% in Q3. That was softer than expected and the slowest pace since the end of 2020. Equity markets appear to be struggling to come to terms with the idea of elevated interest rates. But ultimately, higher rates are mostly just reflecting a stronger economy, and that’s good news for profits. Ryan Detrick, Chief Market Strategist, just wrote about how forward estimates of profits and profit margins are rising. It’s just that we’re currently experiencing a “good news is bad news” dynamic – that’s likely to shift eventually.
Typical November Trading: Solid Start, Some Chop & Strong Finish Being a bullish month, November has seven bullish days based upon S&P 500, with four occurring in the first five trading days of the month. This bullish stretch is visible in November’s seasonal chart with solid gains spanning the first six trading days. Following a strong open, the market has tended to drift sideways with some chop through mid-month and into the Thanksgiving holiday before rallying strongly to finish the month. Although historically a bullish month, November does have weak points. NASDAQ and Russell 2000 exhibit the greatest strength at the beginning and end of November. In pre-election years, performance in November has been softer, but full-month performance remains positive on average.
First Trading Day of November: DJIA, S&P 500 and NASDAQ Up 8 of Last 11 From data in the 2024 Stock Trader’s Almanac on page 90, the first trading day of November is the fifth best of all monthly first trading days since September 1997 based upon total DJIA point gained. DJIA, S&P 500 and NASDAQ have all advanced 13 times over the last 21 years. Average performance on the day ranges from a low of 0.08% by S&P 500 to 0.16% by NASDAQ over the last 21 years. Following a bearish streak from 2005 through 2011, all three indexes have been up 8 of the last 11 years.
