After experiencing declines in the first half the month, U.S. stock markets posted gains in the second half thanks to positive earnings reports, robust economic signals, and a new stimulus plan from Bank of Japan Gov. Haruhiko Kuroda.
As of November 3, the S&P 500 Index still sits slightly below the intra-day high it established in mid-September.
The Dow Jones Industrial Average, however, did set an all-time intraday high, and the Nasdaq Composite reached its highest level in 14 years.
The smaller-cap indexes also participated but fell short record levels. But the Russell 2000 is now positive year-to-date, thanks to October’s late-month rally.
Overall, earnings have been positive during this third quarter earnings season.
According to Thomson Reuters, nearly 75% of companies in the S&P 500 have reported third-quarter results ahead of analysts’ expectations, an improvement over the 67% level of the previous four quarters.
FactSet’s data showed that S&P 500 earnings ended the quarter 7.3% higher than year ago levels and well in excess of the 4.5% growth rate expected going into earnings season.
Stocks reacted positively to the Commerce Department’s pre-estimates for Q3 economic growth.
The economy appears to be expanding at a healthy 3.5% clip, thanks to rising consumer, government, and business spending. Housing data released this week was less positive but did not derail sentiment.
On October 31, the Labor Department released its third-quarter employment-cost index, which measures wage and benefit expenses.
While the number raised the possibility that the Fed might act sooner rather than later to raise interest rates to curb inflation, investors seemed to interpret it as a favorable signal.
As expected, the U.S. Federal Reserve ended its bond-buying program last month.
On the one hand, investors are nervous that the Fed might be jumping the gun, but the Fed’s hawkish tone in its October policy statement suggests confidence in the strength of the economic recovery.
Prices of short- and intermediate-term Treasuries traded down, pushing bond yields significantly higher. The Fed stated that the timing of its initial rate hike will be data-dependent.
One sweet treat that could help boost the economy and consumer spending in particular over the coming months is the decline in oil prices. This may be good news for most household budgets, but it has been bad news for the energy sector.
While oil prices appear to be on a long-term downward trend, the sharp recent declines in energy stocks may be creating selective opportunities.
Investors were also treated to better news flow in the second half of October, with no more Ebola cases in the U.S., better global economic news, and a special Halloween treat from Japan.
The Bank of Japan unexpectedly announced that it will expand the annual pace of its asset purchases.
Japan’s action suggests that Prime Minister Shinzo Abe’s efforts to spur the country’s stagnant economy and stimulate more inflation has fallen short over the last few months, thus requiring more drastic measures.
The S&P Midcap 400 Index is now up 5.6% for the year. It still trails the larger cap indices, but is way ahead of the Russell 2000 small cap index’s paltry 0.85% return.
While energy and chemical names Emerge Energy Services (EMES) and Westlake Chemical (WLK) both detracted from the performance in October of the Mid Cap Quant portfolio on negative energy pricing trends, there were some nice earnings-related treats as well.
Portfolio holding Century Aluminum (CENX) reported better-than-expected quarterly profits on October 29th. Shares of Century Aluminum have more than doubled since the beginning of the year.
Higher auto sales and increased fuel-efficiency standards equate toincreased demand for aluminum.
Edwards Lifesciences (EW) was another recent buy made ahead of strong earnings results.
Edwards Lifesciences provides products to treat heart disease. New product launches and transcatheter heart valve procedure growth this quarter both in the U.S. and Europe led to a significant earnings and revenue beat.
The trend toward lower oil prices favors consumer-related and transportation mid cap names as we head into the holiday season.
One portfolio name that looks poised to benefit from this trend is trucking company Old Dominion Freight Line (ODFL), who just posted a good quarter on October 30.
Consumer discretionary holdings, athletic-shoe retailer Foot Locker (FL) and athletic-apparel maker Under Armour (UA), also appear well-positioned for success over the holiday season.
In my opinion, midcap stocks continue to look attractive going into the of the year given their reasonable valuations and attractive growth characteristics relative to their larger and smaller cap counterparts.
DISCLAIMER: The investments discussed are held in client accounts as of October 31, 2014. These investments may or may not be currently held in client accounts. The reader should not assume that any investments identified were or will be profitable or that any investment recommendations or investment decisions we make in the future will be profitable. Past performance is no guarantee of future results.
I am Jane Edmondson, Founder of EQM Capital, a San Diego-based registered investment advisory firm that uses a data-driven approach to make investment decisions. I previously worked as a Quantitative Investment Analyst and Lead Portfolio Manager for an institutional money management firm. I have more than 20 years of financial industry experience and have managed products across major domestic equity asset classes.