New Lows, New Rally
The S&P 500 hit a new low for the year when it sank to an intraday price of $3,491 on October 13. This didn’t stop the market from jolting up 9% for the next two and a half weeks. The S&P 500 ended October with a positive return of 8%.
Volatility has defined the market this year. Large, multiweek rallies have left many investors feeling more and more paranoid as they try to navigate the broader downtrends facing stock and bond markets. FSA’s process requires specific evidence from movements in the market before making investment decisions.
Small Caps and Value Stocks Take the Lead
Looking across asset classes, smaller companies and value stocks outperformed the S&P 500 Index during last month’s wild market swings. For the year, value stocks have demonstrated a strong chin, posting only about half the losses of the S&P 500. Notable laggards for the month were U.S. bonds (Bloomberg Barclays U.S. Aggregate Index) and emerging market equities. Commodities gained some footing, up 6%, mainly as crude oil prices rebounded from their September lows. Year to date, commodities remain the only asset class in positive territory, 28%.
Energy Up, Big Tech Down
For the first time in years, the market bounced without Big Tech’s help. Except for Apple, mega-cap technology stocks have faced mounting pressure. Even though the S&P 500 Index consists of 500 stocks, five ultra-large tech stocks account for nearly 25% of the S&P 500’s weighting. But their anemic performance in October (see table below) did not prevent the overall S&P Index from rising. On the other hand, energy stocks continue to impress. Even though this sector only makes up 4% of the S&P 500 Index, oil and gas companies posted strong gains, rising 26% in October (+69% YTD).
Teatime for the Recession Debate
The Bureau for Economic Analysis released +2.6% for its advanced estimate of third quarter GDP growth. After two quarters of contraction, the divergence indicates a welcome nudge in the right direction. Questions remain whether pressure from higher interest rates will cause a recession. For now, a strong labor market and robust consumer spending remain tailwinds for the economy.
Portfolio Update
The recent rally in the stock market has us on the lookout to begin stepping back into the water. We want to see more evidence of the overall trend in stocks turning positive before shifting heavily back into stocks, but overall stocks are moving in the right direction and seasonally speaking, this is typically a good time of the year for stocks. Some clients in our Tactical Growth and Core Equity strategies will notice we trimmed back some of the inverse positions recently. Otherwise, cash remains king in our portfolios. Additionally, the Schwab money market funds are yielding more than 3% currently.
We continue to seek opportunities in hard-to-find corners of the market. Energy and health care funds have been one source of outperformance. We have also added a merger arbitrage fund producing absolute returns with low volatility in the more conservative strategies.
Please remember to inform your advisor of any changes in your life that might affect your investment objectives and how we manage your money.
Jordan Daugherty, CFA
Investment Analyst
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