Can stocks sustain new highs

Stocks rose yesterday, carried by a continued stream of strong earnings announcements. Weekly first-time claims for unemployment pay hit a pandemic-era low last week prompting bond yields to rise.

N O T E W O R T H Y

The new old thing.  It’s late October and the daylight hours are shorter, yet the days themselves, seem longer.  It is the beginning of that mad push to be as productive as possible through Thanksgiving, so that maybe, just maybe in the first two weeks of December we can claim victory on our projects, deals, gift shopping, holiday makeovers, or whatever we hope to get done before 2022 arrives.  I am sorry to be the one to rouse you if you are not already… roused.

This is also the time of year when markets like to rally.  Optimism abounds.  Maybe it’s the holiday spirit, or perhaps, it is investors and portfolio managers hoping to reconfigure their portfolios for the end of year as the memories of summer slip from short-term to long-term memory.  I am sure you have some theories on this as well.  However, the fact remains that, historically, stocks do display an unarguable pattern of seasonality.  Let’s take a quick look back to 1928.  I have to add that I am happy to report that I actually have many clients who were already borne that year, though most were not likely paying attention to the stock market.  Ok, to the numbers then… 1928 through present.  You may not be surprised that September was the worst performing month for the S&P500.  On average, September registered a loss of -1.0%.  This year’s September losses certainly contributed to that tally, giving up -4.76%.  The best average return prize goes to July with a +1.6% return.  I like July, too.  This current month, on average, is fourth from last, historically returning +0.4%. Month to date, the S&P is up by +5.63%, so we are already ahead of the average.  Ok, we still have a week left, so we really shouldn’t count our chickens yet.  Now to the mad dash.  November has historically returned +0.9% and December a cool… er hot… +1.3%! It doesn’t end there.  January is a good month on average as well, historically returning +1.2%.  That makes it 4 months in a row that have historically returned +3.8% total.  Of course, in recent years we have grown accustomed to bigger numbers, but when you consider that the average annual return of the S&P500 is around +10%, the next four months contributed to 38% of those gains.  So before we get lulled into believing that the next few months are going to be a stock market party causing you to max out on your credit cards, let’s retreat to the overused term “this year is different.”  Well, to be fair, it is.  If we simply ignore the fact. that we are still in the midst of a pandemic, there is still quite a bit to contend with.  We have inflation, a dead-locked Senate with an approaching debt ceiling, potential tax hikes, supply chain logjams, stocks trading at all-time highs, still-too-high unemployment with workers reticent to take jobs… shall I keep going?  Oh, and the Fed is likely going to begin tapering bond purchases next month and may start raising rates next year.  Wait a minute… we can look back at 2013, the year that the Fed last tapered its QE programs.  October 2013 through January 2014 saw monthly returns of +4.46%, +2.8%, +2.36%, and -3.56%, in order.  During that tightening cycle, the Fed began to lift key lending rates in December 2015. The fab four consecutive months starting in October 2015 saw returns of +8.3%, +0.05%, -1.75%, and -5.07%.  Based on Fed Funds futures and expectations from Fed governors, the Bank is likely to begin raising rates in December of 2022.  So, will history repeat itself this year and next?  I need to let you know that averages, while nice, don’t really tell you the full story.  For example, an average up +2% could result from returns of up +6% and down -2%, so technically we would have an equal chance of losing -2%.  If we look back at October through January for those 93 years, gains to losses were 54/39, 57/36, 68/25, and 58/36.  We obviously don’t want to end up in one of those bottom numbers.  If we look at the average losses for those losing years, we get -4.7%, -4.1%, -3.1%, and -3.7%.  Raised your eyebrows yet?  Don’t worry.  if you are a long term investor, the numbers are still in your favor. Stay focused… get those projects… and shopping done as early as possible.

THE MARKETS

Stocks rallied yesterday on solid earnings and an unexpected dip in weekly unemployment claims. The S&P500 added +0.30%, the Dow Jones slipped by -0.2% (thanks to losses by IBM), the Nasdaq Composite Index gained +0.63%, the Russell 2000 rose by +0.28%, and the S&P500 ESG Index climbed by +0.33%.  Bonds fell and 10-year Treasury yields tacked on +5 basis points to 1.70%.  Cryptos slipped by -3.24% and Bitcoin retreated by -5.02%.

NXT UP

– Markit Manufacturing PMI (October flash) is expected to have fallen to 60.5 from 60.7.

– Markit Service PMI (October flash) may have risen to 55.2 from 54.9.

– Last night Intel beat but provided weaker metrics and guidance.  SNAP missed on sales and provided weak guidance and will likely affect social media stocks today.  Mattel and Chipotle beat on both EPS and Sales.  This morning, HCA Healthcare and American Express beat on both top line and bottom line, while Honeywell, Schlumberger, and Roper Technologies beat on EPS but missed on Sales.  VF Corp missed on both counts.

– Next week is a big week for earnings announcements in addition to regional Fed reports, more housing numbers, Durable Goods Orders, GDP, Personal Income/Spending, and the PCE Deflator.  Check back on Monday for calendars and details.