October: A Scary Month for Investors?

By David B. Armstrong, CFA | Oct 26, 2015 | Weekly Market Commentary

Historically, October is when all the bad stuff happens: the Crash of 1929, Black Friday of 1987, and who can forget the 2008 implosion? Certainly not Dean and I who had JUST started Monument in May of 2008!  I’m not aware of many other things that will test the resolve of two humans like starting a new wealth management firm in the middle of the largest financial crisis this country has seen since the Great Depression!  Oh, and last year we had the October EBOLA SCARE sell-off.

Let’s get back to the market as it relates to October.  If you look back over the data, September has been the worst month for stocks while October has been positive. With one week to go, October has been a nice treat for investors.  That’s a Halloween reference.

Last week saw a strong finish, extending the S&P 500 winning streak to four weeks, which is the longest since last October’s recovery from the Ebola scare. Since the end of September, the S&P 500 is up an impressive 8.1% through October 23^rd.

This next part is really important to read. It should convince you that there is nothing more important than:

1. Having a plan from which an investment strategy is built around
2. Having an investment strategy that is not subject to emotions and reactions

IMPORTANT PART

This summer has been a rough ride in the market, but if you had gone to sleep or on a vacation in mid-August (where you could not watch the market) and returned this weekend, here’s what you’d come back to… (Chart: Bespoke)

WOULD YOU HAVE CARED WHAT HAPPENED IN THE BLANK SPOT???

The answer will probably be dependent upon whether or not you needed cash during that time.  If so, then hell yes you should care.  If the answer is no, then you should not give two toots.  These pullbacks happen, but if there is no accompanying evidence of any sort of impending financial catastrophe, don’t do anything.

So basically, since the closing low point on August 25^th of 1,867.61, the S&P 500 Index has rallied 11.1% to 2,075.15 as of October 23^rd. That puts the index just 2.6% below the May 21^st closing high of 2,130.82.

For those who are worried that we are heading towards another 2008, I think this looks a lot more like the 1997 Asian currency crisis or 1998’s Russian default and Long Term Capital Management debacle.  This is because unlike 2008, it was troubles overseas that led to the recent 2015 stock market correction.

As the chart from Charles Sherry below highlights, stocks took a dive in 1998 (including a 12.4% decline in just four days) that compares to a nearly 12% sell-off over six days in August.

I understand that the troubles overseas have not gone away. But I also believe that investors don’t think a U.S. recession is imminent, which has been a tailwind for stocks.

One more thing I’d like to point out is last Thursday’s strong market gain. It was driven by European Central Bank (ECB) talk that more monetary stimulus might be on the way, and was followed up by Friday’s announcement of rate cuts by China’s central bank.

Prospects of more stimulus from global central banks, combined with growth at home, are stereotypically a recipe for a U.S. rally.

We read data on earnings from several different sources but according to Thomson Reuters, U.S. firms are once again beating low expectations on the earnings front. While Thomson Reuters continues to project that profits will dip slightly in the third quarter versus one year ago, the general trend suggests that earnings will begin to rise again for S&P 500 firms in either the fourth quarter or by early 2016.

While there are always risks as we head into the end of the year, I offer this formula:

Super easy monetary policies  +  Modest U.S. economic growth  +  Expectations U.S. corporate profits should begin to rise  =  Recovery in U.S. stocks

Oil

Want to know what’s up with oil?  This Bespoke chart says it all.  Look at the upward move in the 2015 inventories – When inventory goes up, prices tend to go down, so don’t expect a rise in oil prices in the short-term.  This is a huge benefit for the consumer (remember, 70% of GDP is based on the consumer), but bad news for commodity investors and energy companies, which make up a lot of the S&P 500.

Earnings

Almost 500 companies have reported their third quarter (3Q) earnings so far and this week will be the big daddy week. Expect to see lots of news on company reports and probably some market volatility.

According to Bespoke, here’s how we look:

The percentage of companies beating their revenue estimates for the 3Q of 2015 stands at 42.8% which is currently WAY below the average of the 60% that we’ve seen since 2000. I’ll write more on this at the end of earnings season.  The percentage of companies beating their earnings estimates stands at 60%, which is just below the average of 62% dating back to 1998.

Call with questions or concerns.

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