After a bumpy start, the U.S. stock market went up at a blistering pace to end the month on a positive footing. Within the stock indexes, the real action was in the Dow Industrials, which jumped 13.95% last month, its biggest monthly gain since January 1976, its best October on record, and the 11th best month ever. The S&P 500 and Nasdaq Indexes did well (chart below) but not as well as the Dow. The Dow has less exposure to FANMAG stocks (you remember those, the Covid rally darlings: Facebook (Meta), Apple, Netflix, Microsoft, Amazon and Google (Alphabet)) which continue to lag in any rebound rally. Emerging market equities fell -3% on the month with Chinese indices coming under pressure. Global bonds were off -1%, a little more than that in the U.S. bond market (-1.3%).
One of the defining characteristics of the 2022 equity market is the number of big multi-week swings (Volatility). The S&P 500 averages 3.4 pullbacks of 5% or more per year. This year has already seen seven. Corrections of 10% or more happen about once a year. This year has seen three. Declines of 15% or more happen every two years, on average. 2022 has already endured two. There are several reasons for the volatility: the lack of liquidity, no uptick rule, and algometric trading exaggerate swings. The biggest issue continues to be the Fed and its tightening cycle to wring out inflation. The stock market is hypersensitive to any data directly connected to the tightening cycle narrative and for the time being, willing to overlook almost everything else (for example – earnings). Speaking of volatility, it may be worth noting that the Volatility Index has fallen the first three trading days of November while the S&P 500 Index has declined ~4%. That is a pattern reversal worth watching in the days ahead because while rare, it often happens around market bottoms.
Stepping back from the daily activity of the market and looking further afield, a U.S. recession appears to be a rising near-term risk. While the latest GDP figures confirmed that the U.S. economy expanded in Q3, leading indicators, the weakness in the housing market, and the delayed impact of this year’s Fed tightening point to an elevated risk of recession in 2023. Compared to the global financial crisis, the labor market is coming from much tighter levels now, consumers are still sitting on a large pile of savings, banks are better positioned, and the real estate market is supported by still-low supply, positive demographics, and much more prudent lending standards. If a recession does materialize (it’s not a sure thing), the cause of the recession would be the tight policies being used to reign in the demand caused by excess stimulus from 2020/2021. One could venture to say that a potential recession would more than likely be mild. The sample size on this is small, therefore with caution, note that on average severe U.S. recessions have typically seen deeper and longer cyclical bear markets compared to mild recessions.
Be well,
Mike