Good Friday evening to all of you here on r/stocks! I hope everyone on this sub made out pretty nicely in the market this past week, and are ready for the new trading week ahead. 🙂
Here is everything you need to know to get you ready for the trading week beginning October 17th, 2022.
Stocks slumped Friday, capping off a volatile week of trading, a day after posting a historic turnaround rally as investors digested inflation expectations.
The Dow Jones Industrial Average fell 403.89 points, or 1.34%, to end the day at 29,634.83. Still, the index was up 1.15% on the week. The S&P 500 shed 2.37% to 3,583.07 and notched its seventh negative close in eight days. The Nasdaq Composite slipped 3.08%, ending the day at 10,321.39, weighed down by losses in Tesla and Lucid Motors, which declined 7.55% and 8.61%, respectively.
Both the S&P 500 and the Nasdaq ended the week lower, falling 1.55% and 3.11%, respectively.
Stocks fell to session lows after a consumer survey from the University of Michigan showed inflation expectations were increasing, a sentiment that the Federal Reserve is likely watching closely. The tech-heavy Nasdaq led declines as growth companies are most sensitive to interest rate hikes.
At the same time, bond yields spiked, with the rate on the 10-year U.S. Treasury topping 4% for the second time in two days as investors react to higher inflation expectations.
Markets whipsawed throughout the week as investors weighed new inflation data that will inform the Fed as it continues to hike interest rates to cool off price increases. On Thursday, stocks staged a major turnaround. The Dow ended Thursday’s session up 827 points after being down more than 500 points at the intraday low. The S&P 500 rose 2.6% to break a six-day losing streak, and the Nasdaq Composite jumped 2.2%.
Thursday marked the fifth largest intraday reversal from a low in the history of the S&P 500, and it was the fourth largest for the Nasdaq, according to SentimenTrader.
The moves followed the release of the consumer price index, a key U.S. inflation reading that came in hotter than expected for the month of September. Initially, this weighed on markets as investors braced themselves for the Federal Reserve to continue with its aggressive rate-hiking plan. Later, however, they shrugged off those worries.
Still, persistent inflation remains a problem for the Fed and for investors’ worries around the central bank’s policy tightening.
“With core CPI still moving in the wrong direction and the labor market strong, the conditions are not in place for a Fed policy pivot, which would be one of the conditions for a sustained rally in the equity market,” wrote UBS global wealth management chief investment officer Mark Haefele in a Friday note.
“Moreover, as inflation remains elevated for longer and the Fed hikes further, the risk increases that the cumulative effect of policy tightening pushes the US economy into recession, undermining the outlook for corporate earnings,” he added.
This past week saw the following moves in the S&P:
S&P Sectors for this past week:
Major Indices for this past week:
Major Futures Markets as of Friday’s close:
Economic Calendar for the Week Ahead:
Percentage Changes for the Major Indices, WTD, MTD, QTD, YTD as of Friday’s close:
S&P Sectors for the Past Week:
Major Indices Pullback/Correction Levels as of Friday’s close:
Major Indices Rally Levels as of Friday’s close:
Most Anticipated Earnings Releases for this week:
(CLICK HERE FOR THE CHART!)
(T.B.A. THIS WEEKEND.)
Here are the upcoming IPO’s for this week:
Friday’s Stock Analyst Upgrades & Downgrades:
7 Remembering The 1987 Crash
October is known for many things, with incredible market crashes likely being at the top of the list. The Crashes of 1929 and 1987 stand out for many investors and who could forget the selling and volatility of October 2008?
In honor of the greatest drop in stock market history, we’ll take a closer look at the crash of 1987. On Monday, October 19, 1987, the Dow fell 22.6% for the largest one-day drop in the more than 126-year history of the Dow. To this day it is still the largest percentage drop ever, but it now ranks as the 97th largest point decline.
What caused it? The funny thing is that 35 years later I’m not sure everyone can officially agree. Here are some things to know about the Crash of 1987:
For starters, stocks were in the midst of a huge run off the August 1982 lows, with the Dow up more than 40% for the year in early August 1987, amounting to one stretched rubber band.
Then consider Alan Greenspan took over the Federal Reserve Bank in August and to cool things off, was hiking rates. Talk about a bad time to start a new job.
Program trading was blamed as well, with Louis Rukeyser the Friday night before the crash pointing out issues with program trading. (Simply put, program trading meant stocks were liquidated as certain levels were hit. It worked fine until stocks began to fall more than ever expected, leading to more selling as prices dropped.)
Currency markets were on edge as well, as the U.S. wanted Germany to weaken their currency due to the latest trade deficit numbers. The back and forth was all over the media, as recently as the Sunday before the crash.
The selling started earlier actually, as the three days before the crash the Dow was down 3.8%, 2.4%, and 4.6%, making it safe to say investors were on edge all weekend for how things might open on Monday morning. In the end, the Dow fell a then record 508 points for a 22.6% one-day decline, topping the previous largest one-day decline of 20.5% in December 1914, when the Dow began trading after being halted for nearly five months due to World War I.
Something most investors might not know is that stocks still finished the year in the green in 1987. Sure, they were well off their highs and the huge volatility was too much for many investors to handle, but if all you saw was the yearly gain of 2% in 1987, you’d think it was a boring year!
We might not know what caused the Crash of 1987, but we also still don’t know what caused the Flash Crash either. The Flash Crash occurred in May 2010 (when many stocks and ETFs lost huge values, only to regain the losses by the close for one wild few minutes of trading). The truth is with more and more computers involved, we are due to get big swings periodically. March 2020 saw some of the largest swings of all time (seven of the 10 largest point declines ever took place during this year), putting major stress on the system.
Today we do have circuit breakers in place to help calm nerves should we see another major decline in prices, but it’ll take a huge drop for those to kick in.
In the end, volatility is the price of admission and although we think we are much closer to a major low in stocks currently, should we all have the privilege to invest long enough, there will likely be another day stocks fall significantly. And when they do, just remember that the Dow started trading on May 24, 1896, and it has seen wars, famines, pandemics, inflation, deflation, booms and busts, and more. Yet, it has always eventually come back to new highs and we don’t think this time will be any different.
More Bears End in October Than Any Other Month
Not all indices have bottomed on the same day for all bear markets, but the lion’s share, or bear’s share I should say, bottomed in October.
Of the 23 bear markets since WWII 8 have bottomed in October for DJIA and 7 for S&P 500, 6 for NASDAQ, significantly more than any other month. Over all three indices, 7 were in midterm October: 1946, 1960, 1966, 1974, 1990, 1998 & 2002.
DJIA October bottoms: 1946, 1957, 1960, 1966, 1987, 1990, 2002 & 2011. S&P October bottoms: 1957, 1960, 1966, 1974, 1990, 2002 & 2011. NASDAQ October bottoms: 1974, 1987, 1990, 1998, 2002 & 2011.
The month with the next largest amount of bear market lows is March with 4 for S&P 500 – mostly recently in 2009 and 2020, previously in 1978 & 1980. So, odds are a bottom is near.
Inflation and Labor Still A Problem
The NFIB released its latest small business survey this morning with data as of the month of September. As we discussed in today’s Morning Lineup, the report showed sentiment rebounded in September although labor market indicators decelerated further. That was also reflected in the report’s survey of what businesses consider to be their most important problem. While those reporting ‘cost of labor’ as the biggest problem went unchanged, the percentage of respondents reporting quality of labor as their biggest concern dropped four percentage points to 22%. While there was an even lower reading as recently as July, it was the biggest drop since last December, and the current level has fallen out of the top decile of historical readings.
While the lower reading in labor market-related problems seems to reaffirm the slowing employment situation, inflation concerns ramped up modestly in September. 30% of businesses (versus 29% in August) reported inflation as their biggest concern. Additionally, another inflation-adjacent reading also rose with 5% reporting the cost or availability of insurance to be their biggest problem.
On a combined basis, government-related concerns saw a net lower reading last month as well. Concerns around requirements and red tape rose up to a 5% share of responses, but those gains were offset by a two percentage point drop in the share of respondents seeing taxes as their biggest issue. With inflation and labor concerns remaining front and center of small business problems, government-related concerns continue to be muted to a historic degree.
While the bulk of responses view labor or inflation as their biggest issues—62% of combined responses report one of these to be their biggest problem—there was a considerable pickup in those choosing “other” as their response last month. That reading rose from 5% to 8% bringing it from a 14th percentile reading all the way up to the 65th percentile. That is now the highest reading since May when it came in at an elevated 11%. Unfortunately, the report does not provide further detail as to what those “other” concerns specifically are but geo-political issues are likely part of the mix.
Hurricane Claims Come In
Last week’s jobless claims number went unrevised whereas the latest week’s data rose by 9K up to 228K. That brings the seasonally adjusted number back up to the highest level since the end of August and was the first back-to-back increase since the first week of August.
On a non-seasonally adjusted basis, claims remain a hair below 200K and in line with the readings from the comparable weeks of the year in the few years before the pandemic. We would also note that the increase in claims at this point of the year is very much a regular occurrence.
Turning to continuing claims, the latest print for data through the end of September saw a modest 3K increase to 1.368 million. That is only the highest level in three weeks as the indicator remains well below pre-pandemic levels, unlike initial claims.
On a national level, claims are moving higher but it is perhaps too early to say we are in a new trend as opposed to things like seasonality and one-off events like the weather. While 80% of states and territories saw claims move higher this week, a large share of the national move was concentrated in the Southeast likely as a result of Hurricane Ian. In the table below, we show the state-level readings for initial and continuing claims (NSA). Roughly a third of the national move in claims was thanks to claims in Florida more than tripling week over week. Now, initial claims in that state are at the highest level since May of last year. That was matched with a significant pickup in continuing claims as well. Although they have a smaller impact on national claims, other hurricane-impacted areas like Puerto Rico also saw a significant uptick in initial claims.
So Much for the Positive Wealth Effect
As the weakness in equities continues, we wanted to provide an update on where the major averages stand relative to their pre-COVID highs in February 2020. In the case of the S&P 500 and Nasdaq, they’re both still up, but the gains are quickly fading. It has now been just about two and a half years since the pre-COVID high for the S&P 500, and from that peak to this morning, the S&P 500 is up just 5.5% and the Nasdaq is up 5.6%. On an annualized basis, that works out to less than 2.5%. What’s that phrase people kept saying about irrational moves in stock prices?
As if equity market returns relative to the pre-COVID high weren’t pedestrian enough, keep in mind that once you take the impact of inflation into account, investors are actually now solidly in the red. The charts below show the performance of the S&P 500 and Nasdaq on an inflation-adjusted basis by adjusting historical prices based on headline CPI. After adjustments, the S&P 500 and Nasdaq are both down 7.7% from their February 2020 highs. As bad as the investing backdrop has been for equities, long-term US Treasuries have fared much worse than that. On a nominal basis, long-term US Treasuries have declined 28%, and after adjusting for inflation, the declines have been well over 30%.
Best Six Months Up 18-0 Midterm Years
Going back to 1950 the Best Six Months has is best performance from November of the Midterm year to April of the Pre-Election year, by a factor of three. And none of the other years of the 4-year cycle had zero losses.
December and February have been the weak spots with January and April leading the charge. From the October close to the April close BSM beginning in Midterm years gains 15.2% on average, up 18 down 0.
Post-Election BSM: Average 3.1%, 11-8. Pre-Election BSM 4.6, 13-5. Election BSM: 5.3%, 14-4.
Adding in the MACD timing indicator only improves the results slightly. This is worth noting this year at MACD triggered early and the Fed, inflation, recession, oil, the midterm elections, and Ukraine have pushed stocks to dangerous technical support levels. Proceed with caution.
3 Charts to Watch
First, the S&P 500 gained 5.7% the first two days of October, for the best two-day start to any quarter since the second quarter of 1938. Be aware, the S&P 500 added more than 40% after that bounce into the end of the year back then. But what about other 5% gains that spanned two days? Simply put, they are rare but also have taken place near some major lows in recent memory. As the chart below shows, most recently we saw this rare show of strength in March/April 2020, December 2018, August 2015, August 2011, and March 2009. In other words, those weren’t the worst time to accumulate stocks, and this strength more often than not marked the end of weakness and stronger price action was up next.
Second, the calendar could be a major tailwind for investors going forward. Looking at years that ended in “2” showed the S&P 500 bottomed on October 5 historically and opened the door to a big rally. Years like 1962, 1972, 1982, 2002, and 2012 all saw big year-end rallies and we wouldn’t bet against 2022 joining this list.
Third, midterm years historically bottom on September 30 before a strong end-of-year rally. Wouldn’t you know it, the S&P 500 bottomed on September 30 before the huge early October surge. Could history be repeating? Speaking of seasonality, be sure to read this blog on fourth-quarter seasonality.
Here are the most notable companies reporting earnings in this upcoming trading week ahead-
(CLICK HERE FOR NEXT WEEK’S MOST NOTABLE EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
(CLICK HERE FOR NEXT WEEK’S HIGHEST VOLATILITY EARNINGS RELEASES!)
(T.B.A. THIS WEEKEND.)
Below are some of the notable companies coming out with earnings releases this upcoming trading week ahead which includes the date/time of release & consensus estimates courtesy of Earnings Whispers:
Monday 10.10.22 Before Market Open:
Monday 10.10.22 After Market Close:
Tuesday 10.11.22 Before Market Open:
Tuesday 10.11.22 After Market Close:
Wednesday 10.12.22 Before Market Open:
Wednesday 10.12.22 After Market Close:
Thursday 10.13.22 Before Market Open:
Thursday 10.13.22 After Market Close:
Friday 10.14.22 Before Market Open:
Friday 10.14.22 After Market Close:
(CLICK HERE FOR FRIDAY’S AFTER-MARKET EARNINGS TIME & ESTIMATES!)
(NONE.)
(T.B.A. THIS WEEKEND.)
(T.B.A. THIS WEEKEND.) (T.B.A. THIS WEEKEND.).
DISCUSS!
What are you all watching for in this upcoming trading week?
I hope you all have a wonderful weekend and a great trading week ahead r/stocks. 🙂
