While this is an election year, politics isn't the only place you can find an October surprise.
Wall Street can be the source of many surprising events this time of year, when the leaves fall and the scarecrows rise.
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“October has a checkered history and this year will probably bring a couple of surprises,” says Louis Navellier, founder and CEO of Navellier & Associates.
The Dow Jones Industrial Average is up about 12% so far this year, while the S&P 500 is up 20% and the Nasdaq is up 18.3%.
However, consumers still have concerns about the economy.
Analysts writing in Deloitte's September State of the U.S. Consumer report said that while financial sentiment has improved among higher-income households, it has remained relatively stable among middle-income households and lows from 2022.
“Stagnant feelings of financial well-being could explain subdued discretionary spending intentions, as households reported focusing on non-discretionary categories and savings,” the report says.
Analyst cites 'solid' payroll report
“Housing spending intentions continue to rise, which could force consumers to look for savings opportunities in other categories,” Deloitte said.
On Oct. 4, the U.S. Labor Department said nonfarm payrolls rose by 254,000 in September, up from a revised 159,000 in August and better than the Dow Jones consensus forecast of 150,000.
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“The nonfarm payrolls figure derailed even the most bullish estimates,” Navellier said.
“Expected to grow modestly from 142,000 in August, September hit 254,000, the highest level since May, and the August figure was revised upward to 159,000, an encouraging development after four consecutive months of downward revisions. data from the previous month,” he added.
Navellier said it was significant that the unemployment rate fell from 4.2% to 4.1%.
“While stocks are experiencing a relief rally, bonds traded lower and yields rose as hopes of aggressive rate cuts by the (Federal Reserve) to support weak employment trends faded. quickly,” he said.
“The 2-year yield rose (more than 0.13 percentage points) and the 10-year yield almost (0.1 points),” he noted. “The rise in interest rates initially slowed the rally in stocks. In a single day, there has been rhetoric that the next two rate cuts by the Fed will likely be only “0.25 percentage points.”
“This strong report increases the odds that the economy will continue to grow above trend in the next quarter,” said Jeffrey Roach, chief economist at LPL Financial. “Our base case is that the Federal Reserve will cut a quarter point in the next meetings.”
Roach said hours worked dropped to 34.2 in September and were trending below the pre-pandemic average, which he said is an important metric for growth and productivity forecasts.
“Furthermore, this strong payroll report validates that a potential half-point reduction (in the federal funds rate) was completely unwarranted,” he added. “The fed funds futures market is responding accordingly. The only cautionary sign could be the rise of those with multiple jobs.”
The number of people with multiple jobs rose to 5.3%, he said, noting that the last time this proportion was higher was in early 2009, when the economy was in the midst of the Great Financial Crisis.
TheStreet Pro: 'stretched market valuation'
Chris Versace of TheStreet Pro said that the stock market received positive news for the economy on October 4, with a tentative agreement ending the port strike and the September employment report “handily exceeding market expectations.”
“While we enjoy the rebound effect it is having on stocks as we close the week because two concerns have been eliminated, we must also consider that it will keep the market valuation stretched on multiple fronts,” he said.
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Versace analyzed the current market valuation in its October 2 column.
“When valuation is mentioned, many people only focus on the simple price-to-earnings ratio because it is easy or because they lack access to the data necessary to calculate other metrics,” he said.
“However, simple can be deceptive and that's why we prefer to use a few different valuation metrics, to make sure we have the right context.” he added. “Often that context, both for the market and for individual stocks, is history.”
Versace pointed to the dividend yield, which is the amount of money a company pays shareholders to own a share divided by its current share price.
“Of the slightly more than 500 members of the S&P 500, more than 400 pay dividends,” he said. “Some have better returns than others, while other companies, including our own PepsiCo (ENERGY) have a growing dividend policy”.
Versace said this information allows investors to examine aggregate dividend payments for the S&P 500 and use dividend yield analysis to see if that market barometer extends.
He looked at the mismatch between an expensive (higher) P/E multiple and an expensive (lower) dividend yield. On the contrary, he said, when a P/E is cheap (low), the market's dividend yield will be high.
Although the S&P 500 dividend has been slightly higher recently than it was on Sept. 30, Versace said it is still at a very low historical level.
“This adds to the view that the market is under pressure at current levels and supports our short-term view of staying on the sidelines,” he said.
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