A Couple Dashes of Seasoning

Oct 25, 2021

By Pete Biebel, Senior Vice President

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Over the past couple months, you’ve probably heard a sprinkling of sage market analysts describing the seasonal tendency for the U.S. stock market to exhibit weakness in September and October followed by a rally into year-end. Many recent years have been peppered with tastings of that seasonality. This year, so far, has been no exception. Following a high in early-September, the negative aspect of that seasonal tendency was apparent.  Stocks couldn’t cut the mustard and skidded lower into early October. But a couple weeks ago, they made a death-defying reversal (See No Time to Die) and began their recent charge. Will this year exhibit the usual seasonality, or will this thyme be different?

A rally late in the prior week left the market in a pickle. The gain was sufficient to instill a whiff of optimism for the bulls, but not quite enough to be confidently bullish. Any big decline early last week would have dropped the market right back into the soup. Instead, the averages all climbed higher early last week, and the foulness of September’s bearish action was just a fading aroma.

For the week, the Dow Jones Industrial Average (DJIA) gained 1.08%. The NASDAQ Composite Index (COMP) was a dallop better, advancing 1.29%. The S&P 500 Index (SPX) salted away a 1.64% gain. Both DJIA and SPX reached new intraday highs last week, and both ended at their highest weekly closes ever. All eleven S&P sectors were up on the week. Eight had gains of 1% or more, with Real Estate, Healthcare and Financials each climbing about 3% give or take. The mixture of a stout advance for the week and the spread of gains across all sectors was just the sort of nourishment the bulls needed following a weak September.

Peeling back the layers of the onion, it’s a bit surprising that the week wasn’t more tear-inducing. For a stock market that has often shown a sensitivity to higher interest rates, its ability to rally while the yield on 10-Year Treasuries climbed through the week was impressive. The 10-Year yield rose steadily from 1.57% at the end of the previous week to a high near 1.69% on Friday before ending the week near 1.66%. Those are the highest 10-Year yields in about five months. In addition to higher rates, stocks also had to cope with a Fed futures market that is now signaling that a Fed rate hike is likely within the next eight months. Perhaps the stock market is hoping that the higher rates and more aggressive rate hike expectations will curry favor with the Fed, increasing the likelihood that the Fed will be more aggressive in fighting inflation.

Adding a little spice to the week was a different type of season: earnings season. The dribble of reports in the previous week became a torrent of reports last week and will become a full-on deluge this week. Reports from several of the largest U.S. companies are due this week. So far, the results have been typical. About 90% of reporting companies have beaten their consensus estimates. This is the first quarter since the recovery began in which the rate of earnings growth is slowing. Some of the weakness in September may have been in anticipation of how the market might react to slowing earnings growth.

Based on activity through last week, it seems that the experience thus far into the new earnings season has been generally favorable. Earlier in the year, when the market averages were in a more extended condition, it wasn’t unusual to see a negative stock performance following what seemed to be a positive earnings surprise. True, there has been a peppering of sizeable losses in some of the reporting companies’ stocks, but most of those were limited to the very high-growth, high-P/E names. At least last week, the largely positive reaction to earnings announcements was a tailwind for market performance.

There seems to be nothing to stop a continuing advance. Covid is a fading concern. And although the Fed’s policy actions may be more aggressive in the coming months than had been expected last summer, the market is comfortable with what it anticipates the Fed will do. Supply-chain disruptions continue to be a concern, but it seems that things will need to get a lot worse before it becomes a negative for the overall market.

SPX ended last week near 4545. While I believe additional gains are likely, I suspect that they’ll be limited to just a pinch. My guess is that SPX is unlikely to get beyond the 4625 level plus or minus 25 points in the next month or two. On the downside, there’s not much reason for concern unless and until SPX falls about 100 points or more. The critical level currently seems to be at the 50-day moving average near 4446.

This week’s economic report calendar has more variety than a spice rack. The updates on manufacturing activity and housing prices early in the week are likely to receive bland reactions. The Durable Goods data on Wednesday will bring a little more pizazz. The late-week reports on Unemployment, GDP and the Chicago PMI seem to be the spiciest items on the menu.

Date Report Previous Consensus
Monday 10/25/2021 Dallas Fed Manufacturing Survey, October 4.6 4.9
Tuesday 10/26/2021 Case-Shiller Home Price Index, August, M/M +1.5% +1.3%
FHFA House Price Index, August +1.4% +1.3%
New Home Sales, September, SAAR 740K 760K
Consumer Confidence, October 109.3 109.0
Richmond Fed Manufacturing Index, October -3 +5
Wednesday 10/27/2021 Durable Goods Orders, September, M/M +1.8% -0.9%
Durable Goods Orders ex-Transportation, M/M +0.2% +0.5%
International Trade, Trade Deficit, September $87.6B $87.9B
Wholesale Inventories, September, M/M +1.2% +1.0%
Thursday 10/28/2021 Initial Jobless Claims 290K 290K
GDP, Q3, Q/Q, SAAR +6.7% +2.7%
Pending Home Sales, September, M/M +8.1% +1.7%
Friday 10/29/2021 Personal Income, September, M/M +0.2% -0.1%
Personal Spending, September, M/M +0.8% +0.5%
Chicago PMI, October 64.7 64.2
Consumer Sentiment, October 71.4 71.4


Links to previously published commentaries can be found at benjaminfedwards.com/For Our Clients/Educational Resources/Market.