The second half of October was positive for stocks and global risk assets

Commenting on today’s trading and the second half of October’s performance, Gorilla Trades strategist Ken Berman said:

second half

StockSnap / Pixabay

Seasonality

Although from a statistical standpoint, October is the most volatile month of the year, the second half of the month is usually bullish and this year, stocks closely followed the seasonal patterns. The major indices sold off hard in the first few days of October, amid a surge in volatility, but, the second half of the month was clearly positive for stocks and global risk assets. The de-escalation of the trade war with China, the subsiding risk of no-deal Brexit, the much-better-than-expected corporate earnings all boosted investor sentiment, and while the global economy remains fragile, the stocks are also helped by the easing cycle of the major global central banks. The month ended with the Fed’s third rate cut in a row, and while the consumer economy showed a few signs of weakening ahead of the key holiday season, stocks remain bullish both short- and long-term.

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Almost all of the key sectors gained ground in October, with only the defensive utilities pulling back slightly following two wildly bullish months. The healthcare sector was buoyed by the a string of great quarterly reports in the second half of the month, but tech stocks financials, industrials, and services also contributed to the broad rally. Financials hit their highest levels in over a year, thanks to the rising Treasury yields and the bullish earnings, pushing the S&P 500 to a new all-time high. Consumer goods and materials lagged the broader market, as the weaker-than-expected retail sales figures and the sluggish energy market weighed on the sectors.

Divergence

We saw stronger divergences at the level of individual stocks, in comparison to the key sectors, due mostly to the ongoing earnings season. While, in general, corporations outperformed analyst expectations, there were a few notable negative outliers as well. McDonald's (MCD, -5.8%), Twitter (TWTR, -25.5%) Coca Cola (KO, -1.1%), and Texas Instruments (TXN,-8.4%) were among them, while IBM (IBM, -5.8%) continued to struggle in the third quarter. It's harder to choose from the plenty of bullish surprises, but Bank of America (BAC, +11.2%), General Electric (GE, +16.2), JP Morgan (JPM, +8.2%), United Health (UNH, +16.5%), and Intel (INTC, +10.7%) all greatly contributed to the rally.

After months of significant divergences between the smaller and the more valuable companies, the capitalization groups had a more balanced October. The bullish trend in Treasury yields led to some rebalancing in favor of the smaller issues, as the low interest rates tend to favor larger companies. That said, nano-caps (-0.4%) and micro-caps (+0.3) trod water, performing weaker-than-average, but small-caps (+5.3%) led the way higher in the second half of the month, boosting the key breadth measures. Mega-caps (+5.2%) remained very strong too, thanks to their solid earnings, while mid-caps (3.8%) also had a decent October, which could be the basis of a broad year-end rally in equities.

October kicked off in a decisively bearish fashion, in terms of economic releases, which added to the selling pressure of the first few sessions of the month. While the key indicators were mixed, later on, the majority of the more forward-looking measures were weak, which could mean that economic activity will be weaker in the coming months.

Bull market in second half of October

The ISM manufacturing and non-manufacturing PMIs both missed by a wide margin, with the former dipping below 50 for the second month in a row, and the Producer Price Index (PPI), the Consumer Price Index (CPI), retail sales, industrial production, durable goods orders, and the CB consumer confidence number also provided bearish surprises. On the other hand, the first reading of the third-quarter GDP was much better-than-expected, the government jobs report was solid, and the housing market sent mixed signals, at worst.

Even though most of the key third-quarter earnings are already out, there will still be interesting reports coming out in the first week of the month. With Black Friday and the holiday season around the corner, the key consumer-related economic releases will be under scrutiny, especially in light of the recent deterioration in the forward-looking data. Bulls hope that the 'phase one' trade deal with China will be finalized in the first half of the month, and barring an unforeseen shock, the major indices could all hit new all-time highs. The last couple of months of the year are statistically favorable for stocks, and since technicals and earnings continue to be positive across the board, bulls might be able to ride out the soft economic patch without a major pullback. Stay tuned!

Key economic releases in November:

1st November (Fri.): ISM manufacturing PMI, government jobs report

5th November (Tue.): ISM non-manufacturing PMI

8th November (Fri.): Michigan consumer sentiment

13th November (Wed.): CPI index

14th November (Thu.): PPI Index

15th November (Fri.): Retail sales

19th November (Tue.): Building permits, housing starts

20th November (Wed.): FOMC meeting minutes

21st November (Wed.): Philly Fed Index

26th November (Tue.): CB consumer confidence

27th November (Wed.): Durable goods orders, Core PCE Price Index, personal spending, Chicago PMI



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver