Bruce Bittles
The strong October rally in the stock market allowed stocks to recover all of their August/September losses and returned the popular averages to within striking distance of their May highs. As the third quarter was ending, investor psychology became extremely pessimistic resulting in a significant inflow into money market funds. This and an unusually large increase in the short interest provided the fuel for the best month for stocks in four years. Stocks now have a large measure of momentum heading into the final two months of the year.
Although corporations reported third-quarter revenue numbers that were softer than expected, overall earnings were better than anticipated. More importantly, it is likely that the third quarter represents the trough in earnings growth. Looking ahead, bottom-line comparisons should be more friendly beginning in the fourth quarter and carrying into 2016.
The technical condition of the stock market has improved and the path of least resistance now is to the upside. Entering the new month, the stock market now has a seasonal tailwind into early next year.
Additionally, November’s history favors aggressive sectors and stocks with the strongest growth prospects. This fits with what is being recorded in our relative strength studies. Information technology has moved into the top leadership spot with consumer discretionary improving to number two.
The improving trend and relative strength of the financial sector is significant because the financials often have leading tendencies for the overall list.
We are also impressed by the improvement in stock market breadth. Among the 100 industry groups within the S&P 500 49% are now in a defined uptrend versus 39% last week. This is important because broad upside participation is a sign of a sustainable recovery as opposed to what we witnessed early in the year as the market churned near the 2100 level on the S&P 500 that eventually led to the correction.
The focus of attention this week will be on the October Employment Report. Consensus estimates are that the economy produced 190,000 new jobs with the unemployment rate falling to 5.0%. This would likely reinforce expectations of a Fed rate hike in December. This would be particularly true should the level of unemployment surprise on the upside with a 4.9% print.
The third-quarter GDP report last week showed the economy stalled at a 1.50% growth rate. Inflation data within the report surprised on the downside but personal consumption was relatively strong. As a result, the odds of Janet Yellen raising interest rates in December have increased to better than even. Given the Fed has raised the prospects of a shift in monetary policy on a number of occasions, it is doubtful that the first rate hike in nine years would upset the financial markets.
All investing involves risk, including the possible loss of principal; there can be no assurance that any investment strategy will be successful.
Got Questions? Ask Guido
Evan R. Guido
Senior Vice President, The Evan Guido Group, Retirement Planning & Portfolio Management
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Sarasota, FL 34236-4702
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