November 2, 2022
Market Summary:
Overall, October featured hotter-than-expected inflation data, mixed earnings results, and higher equity index pricing, with notable strength in industrial sectors. In particular, hopes that the Federal Reserve would slow the pace of rate hikes played a key role in market sentiment for the month.
As for the stock market, we are still in a Bear Market, and experiencing a bear-market rally for the month of October. Time will tell whether or not this is a longer-term market "bottom". The major stock indices are putting in lower highs, and lower lows, since November of last year; which is still in a downturn. From these levels, only when the previous highs of September 12 on the S&P 500 have been surpassed, which is 4,120, will an official bottom be in place. As of this report, the S&P 500 index is at 3.859. Our primary research tool: the Bull-Bear Indicator would also need to turn to Positive status at 55 (above the green line, below). It is currently at 39.29. (Please see the Bull-Bear Indicator below).
Earnings Season Unfolds
Earnings results for the third quarter have been mixed thus far, with tech companies having softer earnings results than their industrial company counterparts.
There have been surprises, both negative and positive. Amazon missed analyst estimates for the third quarter and offered weak guidance for the fourth quarter. Upon the announcement last week, Amazon stock was punished in after-hours trading. However, as markets reversed the next day with resilience, Amazon clawed back at some of its losses from the previous day.
In addition, earnings results have been strong in the energy sector for the third quarter, with Shell Plc's quarterly profits more than doubling. As a result, there is now a planned dividend hike in the cards for shareholders.
Earnings season will continue into November.
Bond Yields Firm
Government bond yields rose for the third straight month in October. 2- and 10-year note yields remain inverted, with the 10-year note yielding 4.076% and the 2-year yielding 4.491% to close out October.
It is worth noting that government bond yields closed off their highs reached earlier in October, with the 10-year yield trading above 4.25% and the 2-year yield trading north of 4.6% earlier in the month.
Strong Labor Market
The U.S. jobs picture remained strong in October, with the most recent September data showing an increase of 263,000 jobs and the unemployment rate falling to 3.5%.
The 263,000 jobs created were just short of Dow Jones estimates of 275,000 jobs. However, the unemployment rate of 3.5% was better than the estimates of 3.7%, helping to leave the door open for future Fed rate hikes.
The labor force participation rate edged lower to 62.3%, and the size of the labor force decreased by 57,000.
Overview and Outlook
The overall market sentiment shifted from extreme bearishness to a more positive slant for equities in October. There is an element of hope present in the market at this moment, with many hoping the Fed will slow its tightening or even pivot and begin cutting rates.
The optimism and bullish seasonals could provide a supportive backdrop going into the end of the year. However, inflation must cool down before the Fed can ultimately wrap up its tightening operations. We get our next look at consumer inflation via the Consumer Price Index (CPI) on Thursday, November 10th, eight days after the November Fed meeting.
Historically, November and December are a strong time of year for U.S. equities. After October's strong display for U.S. stock indexes, the November 2nd Fed meeting (and resulting outlook) could be critical drivers heading into the end of the year.
According to data from CFRA Research, the S&P 500 has risen in 60% of the Octobers, 66% of the Novembers, and 77% of the Decembers since 1945. Many market bulls are feeling enthusiastic about the next two months.
An Important Reminder
While investors may have been cheering over the last couple of weeks in October, it is wise to remain grounded and remember the long-term strategy. Our approach to the markets, since March of this year, has been cautious and more defensive—maintaining a larger than normal cash exposure. This has helped reduce much of the volatility within the portfolios, and to provide the ammo to go after opportunities, possibly at much lower prices. Patience is key in an uncertain environment, like we have been experiencing. We are building our watchlist of securities of what could be great opportunities for portfolio positions.
With that said, how are things with you and your family? I would love to hear an update. And of course, please let me know if you have questions or if there is anything we can do for you.
Thank you for your business and trust. You can contact Womack Investment Advisers with questions at (405) 340-1717 or greg@womackadvisers.com.
Best regards,
Greg Womack,
Womack Investment Advisers, Inc.