This month started with the S&P 5001 falling off a steep cliff, just over -4% in the first few days of October. It eventually got back to even and finally made new highs on the year (more on that later). But if previous highs this year are any indication, it could be time to be cautious (see this month’s chart).
As of today (Thursday), the market has given back any of the excess returns of the new highs. So back into the range we go. But this time, to us, it is slightly different. There are seasonal tailwinds now in play, and earnings season has been reasonably positive (though expectations weren’t all that rosy, to begin with). Unemployment is still hitting new lows (FRED Data), and we’re now in the “best six months” as described by Hirsh (see last month’s newsletter).
This month’s chart illustrating the past six months shows where we thought this year’s highs might have been reached and how the stock market has behaved since then. In Mid-September, it tried to break above but failed after a few days. Then in October, another attempt was made with some slight success. Now it is pulling back to that breakout price level. What we believe would be ideal right here is for the market to fall back to that level and bounce upwards on to new highs. That could be a place where we’d get more aggressive going into the end of the year (if our other factors align with that sentiment at that time).
On the Interest Rate front, the Federal Reserve again lowered rates by another 0.25% on the 30th of October. (Didn’t I just say that last month?) We (still) think it is possible they are getting ahead of themselves, but even so, there is the potential to get a short-term boost in the stock market from this move. Our concern (remains) that interest rate cuts are usually used to help the economy in tough times. If the Fed does too much cutting now, it leaves them with less ability to slow down a recession when it eventually gets here. It appears that is the path they are taking.
The S&P 500 has now closed above the highs made at the end of July. My Twitter call has been vanquished. However, even with new highs being hit, the S&P 500 hasn’t been able to decisively break up into a new range. But I’m now hopeful that it can continue upwards into the end of the year.
1 The Standard and Poor’s 500 is an unmanaged, capitalization-weighted benchmark that tracks broad-based changes in the U.S. stock market. This index of 500 common stocks is comprised of 400 industrial, 20 transportation, 40 utility, and 40 financial companies representing major U.S. industry sectors. The index is calculated on a total return basis with dividends reinvested and is not available for direct investment.
2 Charts are for informational purposes only and are not intended to be a projection or prediction of current or future performance of any specific product. All financial products have an element of risk and may experience loss. Past performance is not indicative of future results.