It’s Halloween, but that doesn’t mean investors need to be scared, despite what’s on TV.
See, as earnings season has been kicking into high gear, we’ve noticed many TV pundits advising investors to sell into earnings strength due to uncertainty ahead. This message bothers us because it’s fear cloaked in “advice.”
We’ve mentioned how there are ways to profit from inflation without selling stocks. Our retort to these TV pundits is that we can't prevent the government or the Federal Reserve from implementing anti-inflationary policies. So, we might as well get used to it and learn how to profit in such times (i.e., energy, fertilizer, dividend growth, agriculture, natural gas stocks, etc.)
In other words, if you're worried about inflation from a market standpoint and want to flee the stock market, then you might as well resolve to be out of the market for years. Even if we have a federal leadership change in November’s election, any huge policy shift will take time. It's much more likely November will merely cause gridlock.
While sometimes we can't see the forest through the trees (especially in difficult circumstances), the simple fact of the matter is that when inflation surfaces, we must learn to live with it from a personal spending standpoint, but also profit from it as investors. Oddly enough, as the pundits said to sell into earnings amidst all this uncertainty, the only thing that we've seen so far for certain is that many companies continue to boost underlying earnings and lead the market higher so far, similar to the summer.
For S&P 500 companies that have announced earnings as of this writing, revenues are up just 1.1% above analyst estimates. But earnings are up an “unexpected” 5.7% over analyst estimates.
Once again, businesses are adapting to economic conditions better than the Fed. They’re learning to live with high inflation and it’s showing up in earnings.
Scary Midterm Octobers, Positive Later Returns
Still, some interesting historical corollaries have emerged lately, as well as recent comparisons to the middle of the summer. To us, that means one can view October with fear (a mistake in our opinion) or with the rational hope that we’re once again in our trading range and historically, especially in midterm election years, bear markets tend to die or subside.
In five years, that was the case (1962, 1987, 1990, 1998, and 2002). Four of those five instances were in midterm election years:
Could this mean we’re headed for political gridlock, as is often the case in midterm election years? Markets would welcome that, if true.
With that historical context out of the way, this year so far, the bottom of our trading range in the S&P 500 came on Oct. 12, with a close of 3,577. While we can’t claim the worst is over, the trading range bounce since then has the S&P 500 up 7.6%, as of this writing. This falls right in the sweet spot of past historical October bear market lows:
One of our most trusted economists, Ed Yardeni of Yardeni Research, along with his chief quantitative strategist, Joe Abbott, dug deeper (to our benefit). They calculated that since 1942 during each of the three-month, six-month, and 12-month periods following the last 20 midterm elections, the S&P 500 was up on average by 7.6%, 14.1%, and 14.9%, respectively:
This historical mirror imaging also has happened to correspond with the recent reversal off oversold levels in the trusty Big Money Index (BMI) from MAPsignals:
This isn’t surprising given the “big money” buy/sell action recently. Buying is building while selling dries up:
As of now, the datapoints above seem to be reinforcing our thesis of range-bound trading off 2022 lows. But let us be transparent: we’re not propping up an all-clear signal just yet.
Still, earnings are driving this upward bounce. Yes, big tech earnings have not been great. However, looking deeper into those firms shows the results appear to not be that bad – there is positivity about these firms’ operations mixed in with the red numbers. Plus, earnings beats elsewhere in the market have developed an increased breadth in buying this time around.
So, while we don't know how close we'll get to the top of this trading range, the pattern that was established earlier this year seems to be going again. This is the life of range-bound trading in October in a midterm election year. It can be a bit scary, to be sure. But like Halloween, there are often sweet rewards in the end.
*The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
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