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The political circus is in town for another week. I never thought I would be happy to see the return of more pharmaceutical and incontinence commercials, but this year it seems that the political ads have been particularly vicious and intense. Perhaps it has always been this hateful and hurtful and full of discrepancies. Maybe now it’s just more apparent with our global pushes towards technology and transparency. Political cycles are part of our investing reality, along with a multitude of other cycles. Political cycles are just louder and a little sloppier because all the noise can foster agitation and confusion. Hmm. Maybe that’s why it’s done that way…
After the Federal Reserve interest rate cut the end of September, one might think that bond markets would rally at least for the month of October. Nope. There has been more of a “Buy the rumor, Sell the news” response in fixed income markets. While the very short-term Bloomberg 1-3 month T-Bill Index is up +0.35% MTD, the rest of the fixed income indexes are in negative territory for the month. The Bloomberg U.S. Aggregate Bond Index (AGG) is down a very sharp -2.45% MTD, leaving it up +1.89% YTD. The Bloomberg Municipal Bond Index is down -1.37% MTD, and up +0.90% YTD. Long term bonds took the biggest hit in October, with the US Treasury 20+ Year Index down -6.02% in October, and down -4.53% YTD.
Equity markets may have been distracted by the bond market action, turning in a mixed October. The S&P 500 Index (SPX) is up +1.14% MTD, while the S&P 500 Equal Weighted Index is down -0.06% MTD. The S&P MidCap 400 Index is up +0.59% MTD, while the S&P SmallCap 600 Index is down -0.67% MTD. The best performing sector thus far in October has been the S&P Internet Industry Index up +7.52% MTD. The interest rate sensitive sectors are also enjoying October, with the S&P Composite Banking Sector Index up +4.55% MTD, and the S&P Composite Financials Sector Index up +4.06% MTD. The S&P Pharmaceuticals Industry Index is up +4.33% MTD and the S&P Software & Services Index is up +4.49% MTD.
The S&P Composite Oil & Gas Equipment Industry Index is having the roughest October of the sectors we follow, down -3.70% MTD. The S&P Health Care Index is down -3.34% MTD. International equity markets are also sliding in October. The MSCI EAFE Index is down -4.00% MTD, the MSCI Europe Index is down -3.34% MTD, and the MSCI Emerging Markets Index is down -2.89% MTD. It should also be noted that the Volatility Index (VIX) has closed over 17 every trading day of October. The number 17 is considered as a ‘line in the sand’ between lower market volatility and higher market volatility. The VIX is up +18.15% MTD.
In October we made adjustments in fixed income allocations from floating rate bonds into short-term fixed rate bonds. As the Federal Reserve lowers interest rates further, floating rate bond funds will see their current returns decline, which is normally followed by increased selling pressure. Floating rate bond funds have served us very well, but fixed rate bonds should be demonstrating relative strength going forward. We are closely monitoring both corporate high yield and municipal high yield bonds for opportunities. On the equity side, in October we added to the financial sector and large cap value positions. We also added exposure to technology as that sector experienced a returning inflow of assets at the end of the month.
Either way, we are settled in for the best part of the calendar cycle for equity investors. Since 1950, November, December, and January have stood as the best three contiguous months of the year for SPX performance. This is also a bullish period for Sector Seasonality Cycles. The month of October marks the start of these bullish cycles for all eleven industrial sectors. These cycles may run for as short as two months to as long as eight months. It’s a very good time to be an investor.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
© 2024 Edward D. Foy. [email protected], www.foyfinancial.com.
Sources: StockCharts, Morningstar, Stock Trader’s Almanac.