Not so Spooky October
Despite October’s well-deserved reputation as the worst month of the year for stock markets, this October was pretty uneventful. At the close of trading on October 1st the S&P 500 index stood at 5,708 points. On October 18th it reached the all-time high of 5,864 and subsequently closed the month on October 31st at 5,705 points. Aside from the last two trading days of the month, there was really nothing spooky about October 2024. Investors were in an upbeat mood, willing to see the proverbial cup half-full when it came to economic data and corporate earnings releases.
For instance, here are some of the data points released during October:
Manufacturing production declined in August and September
Durable goods orders declined for the 6th consecutive month
34,000 factory jobs were lost during the August to September period
Continuing unemployment claims kept rising, approaching 1.9 million (harder to get jobs)
Job openings declined from 3 for every job seeker in 2021 to 1 for every job seeker in 2024
September retail sales (unadjusted raw data) declined 7.5% from August, yet somehow the seasonally (statistically) adjusted sales from the Commerce Department increased 0.4%
Office vacancies stood at 20% nationally
Commercial real estate foreclosures increased 117% from last year (highest level since 2014)
Core PCE (the FED’s favorite inflation indicator) came in at 2.7%, still above the 2% target
Home sales fell to an annual rate below 4 million per year (lowest since the 2008-2010 crisis)
Car sales deteriorated significantly, with Chrysler reporting a 20% drop in deliveries, followed by Ford and Tesla. General Motors somehow had better third quarter deliveries
AT&T and Verizon both reported fewer phone sales (upgrades) despite adding new subscribers
Coca Cola and Pepsi both reported lower sales volumes, with Pepsi closing 5 bottling plants
Starbucks reported lower sales volumes, Denny’s is closing 10% of its restaurants, while TGIF is preparing to file bankruptcy.
Airlines and cruise lines reported solid bookings for the coming months
The economic data released in October were in line with the data from previous months, as we’ve been reporting in our newsletters. They all point to a weakened labor market, and selective spending by cautious consumers. The lower income households seem to be under pressure for at least a year now. Middle-income households have started feeling the squeeze the past few months, while the higher income households are still doing fine— spending money on experiences and booking vacations and cruises.
You may be asking yourself, “why do investors keep buying shares and pushing stock prices higher if the economic environment is less than rosy”?
The answer probably has to do more with psychology rather than economics. It always seems comforting to join the herd when others are buying. It makes you feel part of the group, and humans are social animals after all. It’s hard to stand alone and stay away from the party, even when going home early is the safe thing to do. The crowd will continue to party until its errors become apparent, then enough party goers will decide to take their chips off the table and go home. Thus, a selling stampede ensues. Notice that while the crowd is still partying, the S&P 500’s Shiller PE ratio reached 37.7* in October. This was the 3rd largest reading ever! The average since 1871 (153 years) stands at 17.16*. And in the previous 5 instances, when the Shiller PE exceeded 30* the S&P 500 eventually plunged between 20% and 89%. In other words, bubbles cannot be sustained forever…
The next logical question you may be asking yourself is “are US stocks in a bubble”?
As we have written in recent newsletters, the US stock market is certainly overpriced when measured against corporate earnings. The absolute price of a stock or an index is meaningless. The price is a relevant metric only if what you are getting in return justifies paying this price. Admiring an asset price at all-time highs doesn’t make it a good deal, unless it provides colossal earnings. So, compared to past periods and compared to foreign markets, the US stock market appears overvalued, as the current prices of US stocks are too high compared to the earnings produced. Markets, however, can remain overvalued for long periods before evolving into dangerous bubbles.
Looking back in history, from the Tulip mania of 1634 in Holland, the South Sea bubble of 1720 in England, the US stock market bubble of 1929, the Japanese stock and real estate market bubbles of 1991, the US dot-com bubble of 2001, and the US housing market bubble of 2007, we can observe that market bubbles typically follow the same 5 stages:
The allure of a new trend: “paradigm shift”
The “this time is different” mentality, therefore higher prices are justifiable
The “fear of missing out” euphoria
The smart money quietly exiting the market
The mass selling and price collapse
It is only when we reach stage 4 that the danger is imminent.
“How are you to know at which stage the market is currently”?
There are signs you can look for to try and identify at which stage the market may be. Typically, the more signs below you are able to observe, the higher the stage:
Extreme media coverage celebrating new records of the stock price or the index level
Rising leverage— Investors borrowing to “put more money to work” at a trendy stock or index
Widespread speculative activity— Cab drivers and bartenders discussing how they are “making a fortune” on a stock (yet still driving a cab or working at a bar)
Companies reporting quarterly earnings that beat expectations, but stock prices drop instead of rising. That may indicate the prices have advanced too much for the reported earnings, and smart money is cashing out
Once you spot these signs, “is there a way to protect yourself”?
When bubbles burst, they hurt all kinds of asset prices, whether they deserve it or not. When the selling begins, indebted investors may have to liquidate other assets to repay their margin (broker loans). For example, a stock market selloff will cause indebted investors to sell bonds, gold, crypto, or even real estate holdings to repay their debts to brokers. Since the price drop in one asset class may cause the price drop of other asset classes, it is very difficult to insulate yourself from broad asset selloffs. Nothing short of complete abstinence from investment (risky) assets can protect you, but this also means no returns either.
There are however, some steps you can take to protect yourself as much as possible, while staying invested. Here at Fierce, we recommend investors follow the 6 guidelines listed below for a more disciplined approach to investing and risk management:
Be cautious when others are exuberant
Avoid hype driven “miracle” assets. They tend to have the biggest price swings, up and down
Avoid chasing home runs with unproven speculative assets
Have entry and exit targets for each position
Take profits frequently. Closing positions profitably makes all the difference in investing
Focus on fundamentals by questioning how reasonable and sustainable the price of an asset is
Of course, there are trade-offs with investing, just as in life. Trying to be too cautious, investors may miss a lot of potential upside price action. Staying too late and partying with the crowd, may cause massive losses. Investing requires the discipline to stand alone sometimes, particularly when the crowd seems to be acting irrationally out of control. Sure, you may forego some gains, but you’ll be able to sleep better at night.
Finally, the US election is next week and if nothing else, we will be done with political ads on tv and online. Given how ugly this election period has been, it is quite likely whoever loses the race will contest the results. We may not know who won until late December or even January. For those who remember the 2000 U.S. election, you remember the outcome was decided by the supreme court based on some 536 defective ballots (hanging chads) from Florida. This time around it may very well be questions about the legitimacy of mail-in ballots arriving late, having no postmark, having no legible signature, being provisional ballots, etc. Whatever the polls may be suggesting, keep in mind the US presidential election is decided by a few thousand ballot difference in the key 6-7 battleground states. The point here is that any outcome is possible pending people’s motivation to vote or not.
In reality, the market doesn’t really care who wins the election, as long as there is a clear winner sooner rather than later. This may be a tall order this year. The market will most likely continue to be volatile until we get a clear election outcome. Investors would clearly prefer to put the election behind them and enjoy a possible Santa Claus rally at the end of the year, instead of worrying about what could come out of the supreme court in January…
Please remember, we are always available to answer your questions and provide you with our opinions and analysis about the economy, the markets, or any other financial matter.
Stay Fierce!
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