September has been far and away the worst month of the year for stocks. After getting through that month with a 1.7% gain we were hoping October, a month that has a bad reputation, would behave itself as well and it did. A month that has a reputation for volatility had relatively low volatility and big market declines we have seen in previous Octobers failed to materialize. Positive movement on a China trade agreement got the market off to a good start, but it is earnings that drive the market. With roughly 50% of the companies in the S&P 500 reporting earnings nearly 80% of them have been better than what analysts were expecting. At the end of the month the S&P 500 had managed to gain another 2% and is now 21.2% higher for the year. Oil prices were unchanged for the month, interest rates moved fractionally higher & gold gained nearly 3%.
The month began on a negative note with a report that manufacturing activity in the U.S. had dropped to its lowest level in 10 years sending the S&P 500 down 1.2%. Recession concerns persisted into the second trading day sending the S&P 500 down another 1.8% and completely erasing all the gain for September. The 3rd day of trading saw a reversal of the downtrend as some started to talk about weaker economic data forcing the Fed to keep dropping interest rates. The last day of the week we learned 130,000 new jobs were created in September and the unemployment rate had dropped to the lowest level in 50 years. At the end of the week the S&P 500 had rallied back to close with a loss of just .8%. The first full week of the month was the most volatile with on again off again trade rumors sending the market back and forth before the announcement of a partial trade agreement on Friday sent the S&P 500 to a weekly close +.6%. The second full week began with a light volume bank holiday session. Mid-week we learned retail sales had declined in September, not good news for a consumer driven economy. However, it is earnings that drive the market and the first look at Q3 earnings was good news and the S&P 500 ended the week .5% higher and back to unchanged on the month. The final full week of the month was the strongest, with many major companies reporting earnings that exceeded analysts’ expectations, sending the S&P 500 +1.2%. The better than expected earnings reports continued into this week and, as expected, the Fed did lower interest rates by 25 basis points for the third time this year and that helped the S&P 500 hit multiple new all-time highs.
The November through January time period is historically the strongest of the year for the market, accounting for 60% of all gains for the entire year. Remember, history is simply a guide, as we remember the November/December market meltdown we saw just last year. The backdrop for the market is good, corporate earnings have been good, unemployment and inflation are low, the Federal Reserve has been reducing interest rates and a trade agreement with China appears to be moving forward. Ongoing attempts to remove Trump from office continue, but with the Senate controlled by Republicans it appears very unlikely to go beyond the political posturing in the House. China trade news is likely to continue to be the leading market driver. With that said, stocks are richly valued and are vulnerable to a pull back. Barring some headline making event we continue to believe buying dips is the most prudent approach.
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