In October the market was on a tear despite all the bad news facing investors. It recovered September losses and then some. October is a transition month in the market. It is the bridge between September, the worst performing month by far, and November which is the beginning of the most promising period in the market year. November, December, and January are historically high performing months.
Three major indices, the Dow, the S&P 500, and the Nasdaq each hit all-time highs in October after a volatile September. In addition, the Mid Cap index and Transports notched new highs in October. These indices have all broken out of their respective trading range and attained new highs in the last few trading days.
The laggard this year has been small cap stocks. The small cap index came close to reaching its former high in September and again in October, but failed each time. On Monday, November 1st, the small cap index was the best performer. It blew through former prices to put in new highs. The strength this week has been impressive, and we think it is significant. It shows increased participation in this rally which is positive across the market and could mean more gains to come.
Many individual stocks have struggled through this year as they digested gains from 2020. The median stock performance lagged the returns on cap-weighted indexes. With strong corporate earnings reported in October, individual stock prices are rising again.
Consumer sentiment has run the gamut this year. According to the CNN Business “Fear & Greed Index”, the emotion driving the market in late August and September was extreme fear at the 28th percentile. That was exactly when investors needed to be in the market. Many expect inflation to result in future interest rate increases, but that may already be baked into stock prices. A sideways market wears investors down and some jumped out in September gripped by fear. At the end of October, the CNN Index switched to Greed at the 70th percentile. Emotions often pull investors in the wrong direction.
Nothing really changed in October regarding the bad news. We still have rising inflation and the threat of higher interest rates. Grid lock continues on Capitol Hill. Supply chain shortages are increasing. Yet, the market is going up. Investors appear to be looking past all the news and focusing on strong third quarter earnings which exceeded expectations.
Most of the time it is futile to try to explain why the market is doing this or that. It often is not intuitive. The key is to watch price movement and not invest by the news. Don’t invest based on what you think should be happening. Let prices tell you what is happening.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.