“Good investors gather information, put that information into current and historical context, then make sound decisions.”
The last week of September equity markets gave investors a feint to the downside before setting a wonderful base. From September 20th to October 13th, an almost perfect reverse head-and-shoulders pattern emerged that effectively powered major market indexes to new highs as of this writing. As has been the case all year, those new highs were not dramatic, and once again didn’t make the evening news. But it was just enough for institutional investors to breathe a sigh of confirmation and get settled in for the historically positive November-to-January rally.
There may be a dozen reasons why doubters cannot or will not believe what is taking place in equity markets. But institutional investors never doubt positive corporate earnings, and especially record corporate earnings, which is what we are currently witnessing. This is not simply a post-COVID rally any longer as the record earnings are eclipsing pre-COVID numbers. The more stirring reality is that the United States’ economy is not even fully opened up yet, that employment is continuing to expand, and that the supply line delays are still problematic. This is not even close to being over.
What is close to being over is calendar year 2021. The very predictable September correction is firmly behind us. October has completely recovered all of that correction and more, and our attention is directed to November, December, and January. This 3-month period has produced the best historical returns for equities since 1950. Granted, there are never any guarantees, but this is not the time to experiment with a contradictory strategy. Rather, this is when you carefully reassess and reaffirm your strengths, which is exactly what we are presently doing. These are the times when relative strength rules.
Just as the sector declines in September were uniform in nature, the sector rallies in October have been nearly identical. The S&P 500 Index is up +6.08% MTD. The S&P 400 Mid Cap Index is up +6.45% MTD. The NASDAQ Composite Index is up +5.40% MTD. The S&P Composite 1500 Information Technology Sector Index is up +6.36% MTD. The Dow Jones Industrial Average is up +5.69% MTD. The leading S&P Composite 1500 sectors are the Energy Sector Index, up +12.70% MTD, Consumer Discretionary Sector Index up +8.57% MTD, Materials Sector Index up +8.27% MTD, and Financials Sector Index up +8.02% MTD. Every sector index has gained in October.
International equity markets are also advancing in October. The MSCI EAFE Index is up +2.94% MTD, while the MSCI Europe Index is up +4.76% MTD and the MSCI Emerging Markets Index is back in positive territory for the year, up 3.48% MTD. As has been the case all year, international equity markets trail behind domestic equity markets, but remain in a long term Bull Market. It is still a global Bull Market.
All of the bond market indexes that we follow were lower in October except short-term U.S. Government bonds which were flat at 0.00%. The Bloomberg (we finally can drop the Barclays name!) U.S. Aggregate Bond Index is down -0.47% MTD. The Bloomberg Municipal Bond Index is down -0.40% MTD. The Bloomberg U.S. Corporate High Yield Bond Index is down -0.25% MTD, and the Bloomberg Global Aggregate Bond Index is down 0.26% MTD. Low short-term rates and rapidly rising inflation are simply not painting a desirable picture for bonds in 2021.
This equity Bull Market has a full head of steam moving into the end of 2021. Remember that institutional investors are the engineers, and they are looking far down the tracks into 2022, as should all serious investors. Equities have plenty of momentum to carry them through a rough patch or two. It’s time to hang tough and hang on.
Edward D. Foy, Manager, SELECTOR® Money Management, Chief Investment Officer, Foy Financial Services, Inc.
Sources: Bloomberg.com, Marketwatch.com, StockCharts.com, Morningstar.