October Trick or Treating Yields Treat
Historically, September has not been kind to investors. Using S&P 500 data from the St. Louis Federal Reserve dating back to 1970, September ranks dead last in returns.
But October has the ghoulish reputation. The Crash of 1929 and 1987 were in October, and the selloff in October 2008 was tied to the financial crisis.
But reputations don’t always square up with reality. October has historically been a favorable month for stocks, according to long-term averages (St. Louis Federal Reserve data).
Following the biggest monthly decline since March 2020, the S&P 500 Index3 rallied last month, posting its best monthly return of 2021—see Figure 1. The index, along with the Dow Jones Industrial Average1, set multiple new highs late in the month.
More impressively, the S&P 500 has cobbled together strong returns for much of the year. Seven of the last ten months have seen an advance of at least 2% in the broad-based index.
Since the beginning of the year, the S&P 500 has set 59 new closing highs, according to LPL Research and S&P 500 data from the St. Louis Fed.
So, what helped turn stocks around following a modest decline in September? The start of Q3 earnings season was the primary catalyst for October’s convincing performance.
Given the unending chatter about slowing economic growth, rising inflation, cost pressures, and significant supply chain bottlenecks, investors were too pessimistic going into the season. Expectations had been lowered and anxieties were high.
The large banks unofficially kicked off earnings season in the middle of the month. Results came in much better than expected, according to CNBC and the Wall Street Journal, and it sparked a shift in sentiment.
Over a two-day period that ended October 15, the Dow rallied 917 points, or 2.7%, according to market data provided by the St. Louis Fed. Within a few days, the Dow and the S&P 500 Index claimed fresh territory.
That doesn’t mean there weren’t any problems. A number of firms said cost pressures and supply chain bottlenecks hampered results. Overall, however, the numbers have been strong.
Here’s another short, but more granular look. On October 1, analysts were forecasting a 29.4% rise in S&P 500 profits versus a year ago, per Refinitiv.
As of October 29 (with 56% of companies having reported results), analysts had ratcheted their estimate to 39.2%, a significant upward revision. As we’ve seen in recent quarters, Wall Street analysts have been far too conservative in their profit forecasts.
Anything north of 20% would historically be strong.
Today, we’re comparing recent results with numbers from a year ago, when the economy was just beginning to recover from a short but severe recession. Still, an upward revision of nearly 10 percentage points is impressive.
Also aiding sentiment, analysts have upwardly revised estimates for Q4 and 2022, which have also aided the broader stock market.
With the economy growing and corporate profits exceeding forecasts, low interest rates have left investors with few options.
Solid economic growth, impressive profit growth, and low interest rates, which offer little competition for stocks, have sparked strong gains this year for investors in well-diversified stock portfolios.
Yet, and not to throw a cold towel on the strong year-to-date-performance, we can never discount the possibility of a market correction.
Inflation remains a threat and the Federal Reserve has tilted slightly more hawkish as of late. Nonetheless, the fundamentals have been quite positive.
If you have any questions or want to discuss any other matters, please feel free to reach out to your advisor.
1 The Dow Jones Industrials Average is an unmanaged index of 30 major companies which cannot be invested into directly. Past performance does not guarantee future results.
2 The NASDAQ Composite is an unmanaged index of companies which cannot be invested into directly. Past performance does not guarantee future results.
3 The S&P 500 Index is an unmanaged index of 500 larger companies which cannot be invested into directly. Past performance does not guarantee future results.
4 The Global Dow is an unmanaged index composed of stocks of 150 top companies. It cannot be invested into directly. Past performance does not guarantee future results.
5 CME Group front-month contract; Prices can and do vary; past performance does not guarantee future results.
6 CME Group continuous contract; Prices can and do vary; past performance does not guarantee future results.
It is important that you do not use this e-mail to request or authorize the purchase or sale of any security or commodity, or to request any other transactions. Any such request, orders or instructions will not be accepted and will not be processed.
All items discussed in this report are for informational purposes only, are not advice of any kind, and are not intended as a solicitation to buy, hold, or sell any securities. Nothing contained herein constitutes tax, legal, insurance, or investment advice. Please consult the appropriate professional regarding your individual circumstance.
Stocks and bonds and commodities are not FDIC insured and can fall in value, and any investment information, securities and commodities mentioned in this report may not be suitable for everyone.
U.S. Treasury bonds and Treasury bills are guaranteed by the U.S. government and, if held to maturity, offer a fixed rate of return and guaranteed principal value. U.S. government bonds are issued and guaranteed as to the timely payment of principal and interest by the federal government. Treasury bills are certificates reflecting short-term (less than one year) obligations of the U.S. government.
Past performance is not a guarantee of future results.
Different investments involve different degrees of risk, and there can be no assurance that the future performance of any investment, security, commodity or investment strategy that is referenced will be profitable or be suitable for your portfolio.
The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material.
The information contained is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.
Before making any investments or making any type of investment decision, please consult with your financial advisor and determine how a security may fit into your investment portfolio, how a decision may affect your financial position and how it may impact your financial goals.
All opinions are subject to change without notice in response to changing market and/or economic conditions.
All rights reserved