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After a miserable October, the setup for November is looking better. Barring a huge rally Tuesday, October will be the third-consecutive down month for the S & P 500 — that’s unusual. Here’s the good news: Stocks are very oversold, and the bond market is acting like it’s going to be difficult to get 10-year Treasury yields over 5%. That’s very good news for stocks. Here’s more good news: November is the No. 1 month for the S & P 500. It’s up 1.7% on average since 1950 and December is the third-best month after April, so the seasonal setup — November to December — is strong. The S & P 500: The best six months (Average since 1950) November up 1.7% April up 1.5% December up 1.4% July up 1.3% January up 1.1% October up 1.0% Source: Stock Trader’s Almanac ‘Earnings are not the problem’ Bears are blaming the miserable earnings season for the October swoon. That’s not quite right. Third-quarter earnings have come in nearly 3 percentage points above expectations so far (up 4.3%), about in line with historic earnings beats. That’s not bad. It’s just that stocks have sold off during earnings season because of the cautious outlook being projected on many earnings calls. Regardless, the always-astute Nicholas Colas from DataTrek has observed “earnings are not the problem.” The macro environment, particularly the uncertainty around the Israel-Hamas war , is clearly a factor for stocks, particularly the price of oil. But the big issue has been rates. “Higher long-term interest rates better explain the now 3-month drop in U.S. equity valuations,” Colas said, noting that the S & P’s July 31 high came just days before 10-year yields broke above their 1-year highs of 4.22%. JPMorgan’s Marko Kolanovic has been bearish for some time, saying the peak effect of restrictive monetary policy still lies ahead, at the same time as consumer savings are diminished and geopolitical risks are elevated. “Consensus expectations of 12% forward EPS growth, which in our view is divorced from these risks, should be revised lower,” he said in a note to clients Monday. But geopolitical risk and higher rates for longer are already largely priced into stocks. It’s also now beginning to be priced into earnings. Fourth-quarter 2023 estimates and first quarter 2024, after being steady for months, are now starting to come down. S & P 500: Q4 Earnings Today: + 8.0% Oct. 1: + 11.0% Source: LSEG S & P 500: Q1 2024 earnings Today: + 8.8% Oct. 1: + 9.6% Source: LSEG The glue that has held the bear case together is higher rates. It’s easy to make a recession call with rates rising, but if rates stop rising, recession is not the base case. But stocks are so oversold — the average stock is down 5% this month alone and almost 14% from its recent high — that the chances for a November bounce are very high, as long as rates behave. The chances the S & P 500 would be down four months in a row is very small. It hasn’t been down four straight months since 2011 and hasn’t been down four straight months ending in November since 1946, according to Jonathan Krinsky at BTIG.
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