October Stock Market: More Trick Than Treat?

The only conversation in September was Fed rate cuts.

The only conversation in October is the election which is leading to a pause in the bull market.

But soon we will get back to normal...that being a focus on the economic environment and what that means for earnings growth and how that translates to stock prices. So, let’s use our time today to review the economic outlook and what that means for stock prices.

Market Outlook

It’s easy to get lost in the cornucopia of economic data. So, the best place to start is with a picture of GDP. As long as that is healthy, then hard to get too hung up about a bad report here or there.

The most successful model in measuring GDP in the United States is GDPNow from the Atlanta Fed. That stands at a fairly robust +3.2% growth estimate for Q3. At this stage the model has well over 80% of the inputs for Q3...so it is not likely to change much.

Some of the most recent data is also very encouraging about the direction of the economy. ISM Services last Thursday being the most impressive with a showing of 54.9 which is well above the previous month at 51.5. Even better is the forward looking New Orders component soaring up to 59.4 which says more good times ahead.

This was a nice relief after another tepid ISM Manufacturing report on Tuesday that came in at 47.2...the same as the previous month. Yes, below 50 is a sign of contraction. But really that has been the case for manufacturing the majority of the last 2 years as rising rate environment is rarely good for industrials. That should improve going forward.

The stock market immediately celebrated the impressive job gains last Friday in the Government Employment Situation report. However, as the news washed over investors, they realized this was not such good news for inflation (especially given the uptick in Average Hourly Earnings to 4%). This may have the Fed being more cautious in their approach to rate cuts.

Bond investors are right now a bit more wise to this issue given how 10 year Treasury rates have actually gone up ever since the 9/18 Fed rate cut meeting. Instead of the recent low of 3.6% on the 10 year Treasury it is now back to 4%.

Yes, some will point out that 4% is basically the long term average and is not necessarily a bad thing. But it does seem odd that the Fed has talked about 1.5% in additional rate cuts between now and the end of 2025. Thus, to see the Treasuries move higher is a bit of a head scratcher.

Here are the key economic events on the horizon:

10/9 FOMC Minutes- investors will be looking for more clues of their plans for future rate cuts.

3 Inflation Reports: 10/10 CPI > 10/11 PPI > 10/31 PCE (trick or treat)- The overall trend has clearly been down for a while making the Fed feel comfortable in finally cutting rates. However, any more signs of sticky inflation, like the unwanted gain in Average Hourly Earnings, then the ever cautious Fed might be slower in rolling out future rate cuts. This would obviously be a negative for the stock market which is very much counting on this additional accommodation.

At this stage I see the 5 month winning streak for the S&P 500 (SPY) coming to an end in October. I am not talking about anything ominous. Just the Presidential election makes for a natural place for investors to press pause.

Pause doesn’t necessarily mean flat or calm. It might end up being a volatile month with a lot of sector rotation. That certainly has been the case so far in October.

Yet once the election results are in hand, I see a bull run resuming with 6,000 a very attractive target to reach by years end. Even better should be the gains for small and mid caps who still have a lot of room to play catch up with their large cap peers.

So I would lean into these smaller stocks. Especially in Risk On industries like industrials, materials, consumer discretionary, banks, auto, home building etc.

The big difference from the first couple years of this bull market should be a greater eye towards value as the nearly 22 PE for the S&P 500 says we are fully valued at this time.

Gladly small and mid caps are a more appealing 15-16 PE as a group. Again, this is why they should be the group that outperforms in the months, and likely years ahead.

Thankfully our POWR Ratings has a small cap bias...and a value bias. So we really are coming into the sweet spot for the top stocks selected by the system. This should lead to some great outperformance in the months ahead.

As always, my favorite POWR Ratings stocks are shared in the section below...

What To Do Next?

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Steve Reitmeister…but everyone calls me Reity (pronounced “Righty”)
CEO, StockNews.com and Editor, Reitmeister Total Return

SPY shares fell $0.37 (-0.06%) in after-hours trading Tuesday. Year-to-date, SPY has gained 21.73%, versus a % rise in the benchmark S&P 500 index during the same period.

Steve is better known to the StockNews audience as “Reity”. Not only is he the CEO of the firm, but he also shares his 40 years of investment experience in the Reitmeister Total Return portfolio. Learn more about Reity’s background, along with links to his most recent articles and stock picks.

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