After a dismal September, expectations were pretty low for this month’s returns. Despite October historically being a strong month (it is the third-best month of the year behind December #1, and April #2)1, given the overall bleak returns for 2022, there wasn’t much optimism toward continuing that trend this year. Surprisingly October has shown strong results.
The month opened with significant gains. On Monday, October 3rd, the September Institute of Supply Management Manufacturing Index came in at 50.9. Economists expected a reading of 52.41; in other words, manufacturing slowed more than expected. This cheered markets because it appears the Federal Reserve’s (Fed’s) policies are having an impact on the economy. The PMI Manufacturing Index, released the same day, showed a reading of 52, which was slightly higher than economists’ expectations (51.8)2. So, while the economy may be slowing it is not crashing. This mixed economic data buoyed the markets and the Dow Jones Industrial Average (Dow) gained 765 points (2.66%), the S&P 500 rose 93 points (2.59%) and the NASDAQ Composite Index (NASDAQ) grew 240 points (2.27%).
Gains continued the next day and for the first time in history, the Dow had back-to-back 700+ point gains3. This time it was data regarding recent job openings. That data showed that job openings for August were 10.1 million, down just over a million from the prior result, again surprising economists. While that means companies are hiring less and preparing for waning demand, it also could put less upward pressure on wages. That, in turn, could reduce the incentive for companies to raise prices, lowering the rate of inflation, which in turn could keep the Fed from raising rates by more than it currently expects.4
Coupled with the previous day’s manufacturing data, the markets grew hopeful that the Fed’s actions are calming inflation. The day closed with the Dow up 825 (2.8%), the S&P 500 higher by 93 (2.6%), and the NASDAQ rising 232 (2.23%).
Of course, October wasn’t all smooth sailing and several trading days featured significant intra-day swings. Keith Buchanan, portfolio manager at GLOBALT Investments summed it up this way: the swings in the major indexes reflect a “tug of war” between corporate America and the Federal Reserve that has left investors attempting to balance what companies are reporting and what that means for future interest rate hikes. “The intraday action of the day is kind of a microcosm of what we’ve been feeling as investors over the past several weeks,” Buchanan said. “The optimism is built almost entirely on a pessimistic outlook. The optimism of the Federal Reserve pivoting only occurs in a scenario where things deteriorate more quickly, from a macroeconomic standpoint.5”
In other news, the strong U.S. dollar has continued to concern economists. On October 21st the dollar fell dramatically after Japan intervened in its currency market. Markets again cheered – the belief is that a softer dollar will be another sign to the Fed that their policies are working and continued dramatic interest rate hikes may moderate.6
The next regular meeting of the Fed is this week and it’s widely expected that they will again raise interest rates by 0.75%. The Fed is scheduled to meet one more time in December and while an interest rate hike is likely, opinions vary on the amount.
Reviewing returns for the month of October, all major markets posted solid gains. As of October 31st, the Dow rose by 4,007 points (13.95%), the S&P 500 gained 286 points (7.99%) and the NASDAQ grew by 413 points (3.9%).
1, 2 www.investors.com “Stock Market, Dow Jones Up Over 700 Points; Oil Stock Spiked” October 3, 2022
3 www.forbes.com, “Dow Rises 800 Points in Historic 2-Day Stretch” October 4, 2022
4 www.Barrons.com, “Stocks Rally for a Second Day” October 4, 2022
5 www.cnbc.com, “NASDAQ snaps three-day winning streak as Big Tech weighs down index” October 26, 2022
6 www.seekingalpha.com, “Dow, NASDAQ and S&P Finish Higher on Hopes of a Less Hawkish December” October 21, 2022
The views and opinions expressed herein are those of the author(s) noted and may or may not represent the views of Capital Analysts or Lincoln Investment. The material presented is provided for informational purposes only. Past performance is no guarantee of future results. No person or system can predict the market. There is no guarantee that any strategies discussed will result in a positive outcome. All investing involves risk and no investment strategy can guarantee a profit or protect against loss, including the potential loss of principal. S&P 500 Index is an index of 500 of the largest exchange-traded stocks in the US from a broad range of industries whose collective performance mirrors the overall stock market. The NASDAQ is an index that tracks the cumulative results on a market capitalization basis of all stocks trading in the NASDAQ system. The Dow Jones Industrial Average is a widely watched index of 30 American stocks thought to represent the pulse of the American economy and markets. Investors cannot invest directly in an index. Diversification does not guarantee a profit or protect against a loss.