Market Strategy 10/31/2022
Not Out of the Woods Yet
The rally in equities from the end of September through last Friday suggests to us where the market wants to go not withstanding challenges that remain in place
Key Takeaways
- With 53% of the S&P500’s companies having reported Q3 results, earnings are up 1.78% on back of 11.4% revenue growth.
- Of the 11 sectors, four have reported double-digit earnings growth, one has reported triple-digit earnings growth, and five have reported negative earnings growth.
- Ten of the 11 sectors have reported positive revenue growth with only one showing negative growth thus far this season.
- The sustainability of the broad market rally since the end of September through last Friday could be challenged this week or even supported by economic data and earnings results scheduled for release.
- Key to this week’s equity and bond market performance is likely to be the FOMC decision and comments thereafter on Wednesday followed by the jobs and unemployment numbers on Friday.
As of last Friday the Dow Jones Industrials have closed higher on the week for four weeks in a row. The S&P 500, the S&P 400 (Mid-Caps), the S&P 600 (Small Caps), the Russell 2000 (Small Caps) and the NASDAQ Composite (some 40% weighted in tech or tech related stocks) have all closed higher in three out of the past four weeks.
A combination of resilience in some of the economic data that’s crossed the transom of late (Q3 GDP up 2.6%; a Q3 earnings season for the S&P 500 that is showing enough positive surprises among corporate results and forward guidance to rally stocks―along with what appears to be improved sentiment to suggest that the Federal Reserve’s efforts may put enough of a dent into inflation to move monetary policy makers to consider tempering their rate hikes as early as December. This has provided some relief for investors.
hile we won’t count our chickens before they hatch we also will refrain from looking a gift horse in the mouth
Fed fund hike cycles are never much fun in the early part of their process. Negative projection early on is too often the order of the day with bears, skeptics and nervous investors painting the darkest of pictures in their projections. Early in the hike cycle calls for the Fed to fail in its efforts are not uncommon. Then as the cycle of higher rates takes hold things that feed the flames of inflation begin to lose their edge, corporate entities, investors, traders and others grasp that instead of the end of the world being around the corner a better order for the next leg of economic growth might be on the horizon if not immediately at hand.
The stock market as a discount mechanism has shown an ability to sense the end of cycles and the beginning of new ones time and time again. The Federal Reserve while proving over the course of its history that it is certainly capable of making mistakes in addressing inflation in a timely manner it has shown an ability to change course and “right the ship”.
This week is chock full of economic data that should provide investors with some clarity as to where the US economy stands in relation to housing, automobile sales, manufacturing, services and jobs (see Key US Economic data listed in this report on page 3).
In addition to this week’s economic data and the Fed’s rate announcement, Q3 earnings season results and any guidance for what might lie ahead from corporate managers will keep market participants busy. Widely followed names in Health care, Information Technology, Financials, Energy and Consumer Discretionary are among those scheduled to report.
Last week’s rally took the Dow Jones Industrial Average, S&P 500, the S&P 400 (mid-Caps), the S&P 600 Small Caps, the Russell 2000 (small caps) and the NASDAQ Composite up respectively: 5.72%, 3.95%, 5.31%, 6.15%, 6.01% and 2.24%.
On a year to-date basis those same indices are off respectively: 9.57%, 18.15%, 14.32%, 14.62%, 17.74% and 29.04%.
A perusal of the aforementioned numbers suggests to us that things are of late getting better even as where markets started the year tells us that we are indeed not yet out of the woods.
For now we continue to suggest investors consider meeting the current challenges in and around the equity markets by:
- Staying the course that favors stocks of “growthier value” and “garpier growth” companies that have proven managements, great products, cash flow and profitability and ideally pay and grow dividends.
- Build shopping lists and look for “babies that get thrown out with the bath water” on down days in the market.
- Consider opportunities for dollar cost averaging.
- Remain prudently diversified across market capitalizations, styles and sectors.
- Consider tax loss harvesting as an opportunity to optimize portfolio positioning and rebalancing
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