Daily Stock Market Articles

The Bulls Take September, October Jitters, and a Fourth Quarter Preview


“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” -Mark Twain

September to Remember
Stocks had a rough start to September, but the bull market continued and it is looking like the S&P 500 will be higher this year in the usually weak month of September. (The S&P 500 was up 1.7% on a total return basis as of Friday, September 27, with one trading day left in the month.) Assuming September holds up, stocks would be up eight of the first nine months of the year (with only the usually bullish month of April in the red) and up 10 of 11 months going back to last November.

The S&P 500 has made 1,415 new all-time highs and no month has made less than September, making the new highs we’ve seen in 2024 all the more special.







Were new highs this month really a surprise? Maybe it shouldn’t have been as past months that started off with a big down day more often than not tended to have strong rallies.





The reason for the rally? The economy continues to surprise to the upside, with forward earnings hitting another new high. The Federal Reserve Bank (Fed) cutting rates is also a tailwind. But let’s not lose sight of the big picture. With earnings hitting new highs and the economy continuing to expand, it’s no wonder stocks have hit 42 new all-time highs in 2024.



Where do those 42 new all-time highs rank? As you can see here this is one of the most ever and it extrapolates out to nearly 57, which would put 2024 in the top five for the most new highs ever.



An October Surprise?
You may be hearing a lot about how October is a month known for high market volatility and large drawdowns. This is true, as 1929, 1987, and 2008 all saw spectacular meltdowns in this spooky month historically. But it is worth noting that overall October is really about an average month, up 0.9% on average, making it the 7th best month of the year. The past 10 years it has gained a very respectable 1.8%, making it the third best month of the year. It was down last year, but hasn’t declined two years in a row for 15 years. October is the worst month during an election year and after the incredible run stocks have seen so far this year, we wouldn’t be surprised at all if we saw some usual October volatility in 2024.



One potential worry for October is stocks have done so well in 2024. With one day to go in September, the S&P 500 was up more than 20% for the year and October has done quite poorly in years that were up nicely heading into the spooky month. In fact, seven of the nine times the S&P 500 was up more than 20% YTD heading into October saw stocks fall the 10th month of the year with an average decline of 3.0%.

That’s the bad news. The good news is things are skewed greatly by 1987 and more often than not the fourth quarter still manages to finish higher, with solid gains the remainder of the final quarter of the year.



The Fourth Quarter Is Here
Let’s say we have some usual October volatility, which wouldn’t be abnormal. Planning for this now would be a wise decision. The good news is November and December historically do quite well in election years, as the uncertainty of the election is removed. Take another look at the chart above to see what we mean.

Looking past possible October volatility, the fourth quarter overall is higher nearly 80% of the time and up 4.3% on average, making it far and away the best quarter of the year.



Breaking things down by the four-year Presidential cycle shows this quarter is up more than 83% of the time, making it one of the most likely quarters out of all 16 to be higher. Of course, a 22% drop in the fourth quarter of 2008 pulled back the average return by a good deal, but to say stocks will be lower three months from now is probably a low probability event.



No year has ever seen the S&P 500 higher the first nine months of the year, but we found eight times that eight of the first nine months were higher. And wouldn’t you know it, the future returns were even better than average. October alone was better than average, and the fourth quarter overall has never been lower and is up a very impressive 6.6% on average.



Lastly, stocks made a new high in September, which could be a signal all by itself the bulls will do well the rest of 2024. We found 21 other times stocks hit a new high this month and the fourth-quarter was higher 19 times and up nearly 5% on average.



The bottom line is this is the best start to any year as of the end of September since 1997. Investors have been rewarded by sticking with a glass half full mentality amid the incessant negativity. Could we see a negative October surprise? Absolutely, but we would use that as an opportunity to benefit from potentially higher prices before 2024 is done.

 

Copper Joins the Volatility Club
Mon, Sep 30, 2024

While the equity markets keep chugging along, there have been some spectacular/peculiar moves over the last several weeks. It started with the Nikkei in early August when it plunged over 10% in a single day. Over the last several days, we’ve seen extraordinary moves in the opposite direction in China. Just yesterday, even as China had its best day in over 15 years, the Nikkei fell more than 4%. As we noted on X, in less than two months now, the Nikkei has seen its two largest days of underperformance relative to the Shanghai CSI 300 dating back to when China joined the WTO in late 2001.

The crazy moves haven’t been just confined to equities either. On the heels of the big run in Chinese equities on Monday, copper got caught in the current with prices surging over 4% in early trading. Throughout most of the trading day, though, prices steadily gave up the gains finishing down over 1%.



Even for a commodity like copper that type of intraday reversal is uncommon. Since 1990, it’s only occurred six other times. It happened four times during the Financial Crisis in Q4 of 2008, and the only two other times were in June 2006 and November 2016 just after former President Trump won the 2016 election. As for how copper performed following the prior reversals, performance was mixed. In the four occurrences during the Financial Crisis, copper was up over 30% six months later each time, but in the six months after the two non-financial crisis periods, it was lower both times. Forward returns were trendless, but that doesn’t make the volatility any easier to stomach.

 

Dividend Stocks with Strong Q4 Seasonality
Tue, Oct 1, 2024

It's the best time of year, at least for seasonality. As shown in the snapshot of our Seasonality Tool below, entering October is the strongest period of the year for three-month returns, and shorter term returns are also some of the best.



Looking at dividend stocks specifically, below is a list of the 30 in the S&P 500 that have been the best Q4 performers over the last ten years. The 30 dividend stocks below have all averaged a Q4 gain of more than 11.5% over the last ten years. At the top of the list is Tapestry (TPR) with an average Q4 gain of 17.4% and positive returns 80% of the time. TPR is already having a banner year with a 30% total return, but if history is any guide, it could tack on even more through year end.

Schwab (SCHW) and Citizens Financial (CFG) rank as the second and third best dividend stocks in Q4 with average gains of more than 15% and positive returns 90% of the time. French-fry maker Lamb Weston (LW) ranks fourth followed by KeyCorp (KEY), which is the highest yielding stock on the list. Notably, Bank of America (BAC), JP Morgan (JPM), and BlackRock (BLK) rank 6th-8th, which means there are six Financials stocks in the top ten.

As you can see in the table, all but three of the dividend stocks shown are up year-to-date, with most of these names up double-digit percentage points entering Q4. It has been a strong year already for high-yielding stocks, and now they have Q4 seasonality as another tailwind.

As always, past performance is no guarantee of future results.

 

October Volatility After Big Gain First Three Quarters



Catalyzed by port strikes, escalating hostilities in the Mideast and uncertainty ahead of the election Octoberphobia strikes again. Cue “Spooky” by the Atlanta Rhythm Section. Perhaps it’s not a coincidence that these types of events also have history of transpiring in October. With the attention focused on Israel and Iran we are concerned the world may be exposed to some new mayhem from Putin, China or other bad actors.

The history of years with gains of this magnitude at this juncture in the year with solid Q3 and September upside performance for the most part have been followed by more bullish market behavior and a continuation of the rally. But as you can see in the table of S&P 500 Performance Following Big Q3 Year-to-Date Gains the bulk of any damage occurred in October.

Of the top 30 S&P 500 9-month gains since 1930 all 30 years ended higher with average gains of 25.9%. Q4s were up 24, down 6, average gain 4.6%. Octobers were up 15, down 15 with an average gain of 0.01%. Of the most recent 12 occurrences October is down 7, up 5 with an average loss of -1.1%, which includes the Crash of 1987 and a -21.8% loss for October 1987.

 

What’s Behind the Melt-Up in Chinese Stocks


Chinese stocks have melted up over the past week, with Mainland China’s main index, the CSI 300, surging a whopping 25% since September 23rd (through the 30th). Just on Monday (September 30th), the index surged 8.5%, taking it to the highest level since August 2023. China’s markets will be closed for the rest of the week due to the Golden Week Holiday.



But here’s some perspective. Despite the surge, Chinese stocks still lag the S&P 500 by a lot over various lookback periods. Since the end of 2022, the CSI 300 is up 9% while the S&P 500 is up 54% (including dividends). Extending the horizon back to the end of 2019 (a quarter shy of five years), the CSI 300 is up 10% while the S&P 500 is up 92%. Pull it back to the end of 2014, almost a decade, and the CSI 300 is up 41% versus a massive 234% return for the S&P 500.

Panic Stimulus to the Rescue … Maybe
China’s central bank (the Peoples Bank of China, PBOC) announced a slew of measures to boost the economy, and markets, on September 24th. This was clearly an acknowledgment that economic growth is faltering. Consumption is running well below trend. Youth unemployment (ages 18-24) hit 18.8% in August (despite the statistical agencies changing the methodology to exclude students). Real estate activity, which is a backbone of the Chinese economy, is crashing, including construction activity, home sales, and home prices. Real GDP growth was up just 4.7% year over year as of Q2 2024, and on track to fall below the Chinese government’s 5% growth target for 2024 (the latest announcements suggest Q3 growth is not looking good). GDP growth is running well below the 2016-2019 trend of 6.5% annualized growth. Even that was a slowdown from the 7.5% annualized pace of growth from 2012-2015.



It was only a matter of time before stimulus was forthcoming, and there was much commentary over the past year as to when it would come. The only surprise was that it took as long as it did, and it was clearly panic. Amongst the stimulus measures announced:

• Cutting the benchmark policy rate
• Lowering the amount of cash that banks need to hold in reserve (to boost lending)
• Cutting interest rates on existing mortgages
• Lowering down payments for second homes

They also announced an offer of 500 billion yuan ($70 billion equivalent) in loans for funds, brokers, and insurers to buy Chinese stocks. No surprise that stocks melted up.

The PBOC has also said there’s more. Note that the PBOC is not really “independent” of the Chinese government (unlike the Federal Reserve here in the US). So, think of these measures as being pushed by the authorities in Beijing.

If you noticed, the measures were geared to boosting lending activity and the real estate sector. Regarding the latter, as I wrote earlier this year, real estate and related activities account for 25-30% of GDP, which is double the peak level we saw in Japan in the 1980s. Chinese authorities had already announced measures earlier this year to prop up real estate, but that’s not helped much. Real estate investment, which is key to watch, remains down 10% year over year as of August. This is partly because authorities themselves have tried to slow down the growth of bad debt in the sector, amid myriad issues with over-levered firms. Of course, that’s hit growth. Historically, property sector investment has come to the rescue of the Chinese economy when it was in trouble (2009-2011 and again in 2016). Hence the move to revive this growth engine.

The problem with these stimulus measures is that Chinea’s problem is not really a lack of borrowing. As Michael Pettis, a Professor at Peking University and an expert on China’s economy, points out, the problem for Chinese businesses is not that banks are capital constrained to make new loans. The Chinese non-financial sector is heavily levered already. Credit to the non-financial private sector is running at 205% of GDP, compared to 149% of GDP here in the US. In fact, as you can see in the chart below, debt growth in the US is falling whereas it continues to rise in China. In other words, output is falling in China even as debt growth is increasing – which means the use of that debt is becoming less productive. As I said above, China’s problem is not that it can’t borrow easily enough.



What China Needs: Fiscal Stimulus for Households
What China really needs is a fiscal stimulus package that ultimately redistributes income from the supply-side of the economy to households. Consumption was never the primary engine for growth in China, but it was still sizable. The problem is that consumption has seized up since the pandemic hit. Retail sales rose just 2% year over year as of August, versus a close to 9% annualized pace from 2017-2019.



Unlike the US, China never boosted households with stimulus measures once Covid hit. Chinese households also tend to save more than American households because there’s no social safety net (like Social Security and Medicare). A big part of those savings went into the real estate market (or in investment vehicles tied to real estate), but not anymore amid crashing home prices. That’s likely a reason why Chinese households have bought more gold over the past year.

Is This Time Different?
Chinese authorities have historically been against “handouts” to households. But that may be changing ever so slowly. The Chinese leadership seems to be acknowledging that stimulus needs to go further than the PBOC’s monetary easing. Details from the latest Politburo meeting, headed by President Xi Jinping, indicate a discussion of economic matters and boosting fiscal spending. This included the issuance of ultra-long government and special-purpose municipal bonds.

The City of Shanghai is piggybacking off of this already. They are planning to hand out 500 million yuan (about $71 million) in the form of consumption vouchers, including for dining, accommodation, cinema, and sports. But that amounts to about 0.0004% of GDP. They’re going to need to multiply that by a factor of 1,000 (if not more) to meaningfully move the consumption needle.

Perhaps this time will be different, with some acceptance that the economy needs more than easier borrowing and the prospect of fiscal spending coming into the picture. The Chinese government does have more than ample space to go this route — the central government will have debt of about 26% of GDP by the end of 2024 (versus over 100% for the US and over 200% for Japan). So, it’s just a matter of will, or rather, how much pain they’re willing to endure before throwing in the towel. There have been various points over the last decade when the rhetoric (or perhaps, investors’ understanding of the rhetoric) was way ahead of what actually happened on the ground. As the saying goes, fool me once, shame on you; fool me twice, shame on me. In other words, we’re going to need to see actual details of fiscal spending before coming to the conclusion that this time is indeed different.

 

Time Sell Rosh Hashanah!



Time Sell Rosh Hashanah!

Happy New Year! Sell Rosh Hashanah, Buy Yom Kippur is set up again this year with the market coming under pressure on the heels of fresh highs and the best 9-month start since 1997. Uncertainty ahead of a tight presidential election race, heightened Mideast tensions and dockworkers striking are poised to exacerbate October’s scary history.

Rosh Hashanah is tomorrow 10/3 this year and Yom Kippur falls on Saturday 10/12. Our stats use the close the day before. This is right in the teeth of October volatility, especially in election years. S&P is down 31 of 53 years from Rosh Hashanah to Yom Kippur with an average loss of -0.4% since 1971. But it’s up 38 of 53 for an average gain of 6.7% from Yom Kippur to Passover.

The thesis is that folks sell positions on Rosh Hashanah the first of the Days of Awe to rid themselves of financial commitments and then return to the market after Yom Kippur, the Day of Atonement. It is no coincidence that this coincides with seasonal October weakness.

 

Good News Is Good News, for the Economy and Markets


There’s been valid concern that employment conditions are deteriorating, ever so slowly. The unemployment rate has increased from a low of 3.4% in April 2023 to 4.3% in July of this year. Hiring also seems to have pulled back a lot, with the Job Openings and Labor Turnover Survey (JOLTS) telling us that the hiring rate (hires as a percent of the labor force) has pulled back to 3.3% — a rate we last saw in 2013 (excluding the peak pandemic months in 2020). I wrote about rising risks a month ago.

The September payroll report went a long way to ease some of these concerns (which is not to say risks have disappeared). Payrolls grew by 254,000 in September, doubling expectations for a 125,000 increase. Monthly payrolls can be noisy and subject to revisions. The good news is that July and August payrolls were revised higher, taking the 3-month average to a solid 186,000. This report also takes on outsized significance because the next two payroll reports are likely to be impacted by Hurricane Helene, with job growth pulled lower in October and reversing in November. The good news is that the port strike has ended, and so that’ll be a non-factor. In any case, it’s going to be January (when we get December payroll data) before we get another “clean” report.





Also very good news was the unemployment rate easing to 4.1%. It was actually 4.051%, just a whisker (or two whiskers?) away from being rounded down to 4.0%. I’ve mentioned in previous blogs how I prefer looking at the “prime-age” (25-54 years) employment-population ratio, since it gets around definitional issues that crop up with the unemployment rate (someone is counted as being “unemployed” only if they’re “actively looking for a job”) or demographics (an aging population with more people retiring and leaving the labor force every day). The prime-age employment population ratio was unchanged at 80.9% in September. That’s higher than anything we saw between 2001 and 2019 (when it peaked at 80.4%).



The fact that the unemployment rate and the prime-age employment population ratio are pointing in the same direction is positive. In our business, it’s about combining a lot of different information, and our life gets easier if the data are mostly telling the same story (good or bad — but fortunately, a good one now).

Income Growth & Productivity Are Driving the Economy

Over the last three months, wage growth has run at an annualized pace of 4.3%, which is solid but shouldn’t raise anyone’s inflation hackles. If you combine wage growth with employment growth and hours worked, we get a sense of aggregate income growth across all workers in the economy. Right now, that’s running at a 3-month annualized pace of 4.4%. If you’re wondering why economic growth keeps exceeding a lot of people’s expectations, especially after recent upward revisions, here’s why: Income growth is powering the economy, as opposed to credit. That is perhaps why this cycle has confounded a lot of people, since we haven’t seen something like this in decades. In fact, consumer credit is up only 1.6% year over year as of the second quarter of 2024, versus 4.6% in 2019, 5.9% in 2006, and 7.8% in 1999. This is also why a lot of people who like to parrot on about M2 money supply have gotten this cycle wrong. M2 is a reflection of credit to the private sector, and that’s simply not growing as it has in prior cycles.



Keep in mind that inflation has likely normalized to around 2% (and would probably be running slightly lower, if not for lagged effects of shelter). Strong wage growth and output growth amid benign inflation implies productivity growth is strong — something we’ve been talking about for a year now, including in our 2024 Outlook. Crucially, that also means the Federal Reserve can continue easing interest rates, and that’s going to be a tailwind for the economy, and markets.

But Can We Believe the Data?

The same people who keep calling for a recession (no surprise, they have a large overlap with M2 watchers) also tend to call the economic data into question. Admittedly, we have seen significant revisions to the data. Employment between April 2023 and March 2024 was revised down by 818,000. The payroll growth chart at the top of this blog does account for this downward revision, and despite that, growth was solid during the revised period. But revisions can go the other way too, as we saw with recent GDP/GDI and savings rate revisions, all significantly positive.

But even if you want to take the economic data with buckets of salt, just look at the market. The S&P 500 was up 22% over the first nine months of the year, and over half of that return has been powered by corporate profit growth. Since the end of 2019, the S&P 500 is up 92%, of which

• Earnings growth has contributed 57%-points
• Dividends contributed 14%-points
• Valuation multiple growth contributed 21%-points

In other words, most of the returns have come from profits (and dividends). Profit expectations continue to move higher, driven by strong sales growth (which tells you that the economy is doing well) and profits margin growth (which tells you companies are in good shape and have operating leverage).



At the end of the day, profits come from the economy, and that’s what drives market returns. So, if you don’t want to believe economic data, hopefully you can believe what markets are telling us about the economy. That’s real money.

 

Insurance Cost Concerns Surging
Tue, Oct 8, 2024

Within the NFIB's Small Business Optimism report, the survey also provides a look into what firms are seeing as their biggest challenges each month. In September, inflation once again came in at top of mind with 23% of businesses reporting this as their biggest issue. Quality of labor and taxes were the two next most common concerns and the only others that single-handily accounted for double-digit shares. Of those, quality of labor saw a particularly large 4 percentage point drop last month.



As mentioned above, taxes were the third most common response in September at 14%. That was up slightly from 13% the month prior. Government requirements and red tape also rose a percentage point and combined the two problems made for 23% of responses. As the election closes in, that is actually a relatively small increase in these concerns as other indicators like the Economic Policy Uncertainty Index have surged.



At a combined 23%, government-related concerns on a combined basis equal the share of businesses reporting inflation as the biggest problem. As mentioned previously, inflation responses were lower month over month. Additionally, current levels are much lower than they were at the peak a couple of years ago. That said, current levels also remain very elevated historically, remaining in the upper decile of readings.



Factoring other categories that can be inflationary-adjacent, the picture changes slightly. One interesting area that has seen a surge recently is the cost or availability of insurance. That index is up to 8% of responses versus only 3% three months ago. That is the most elevated reading since the August 2021 spike to low double digits. Although that is the highest reading in a few years, this problem is not yet elevated from a longer-term historical perspective with September's reading actually matching the historical median. Furthermore, combining a range of expense-related categories (inflation, cost of labor, and cost/availability of insurance) shows that there has been an uptick in cost concerns over the past few months, but things aren't quite as bad as they were a couple of years ago.



Speaking of cost of labor, the combined share of businesses reporting cost or quality of labor as their biggest problem has continued to trend lower, consistent with a cooling labor market. With September's reading coming in at 26%, it was the lowest reading since the spring of 2020.

 

Small Businesses Fearing the Election
Tue, Oct 8, 2024

Early this morning, the NFIB published small business sentiment data for September. The Small Business Optimism Index ticked up from 91.2 to 91.5. While stronger, that wasn't as large of an uptick as was expected as the consensus forecast expected an increase to 92.0. Regardless, sentiment remains historically low in the bottom quintile of historical readings back to 1986.



In the table below, we show each category of the report including the previous month's reading, the month-over-month change in index points, and how those rank as a percentile of all periods of the survey's history. Breadth for components to the headline number was slightly positive with five categories rising, two going unchanged, and another three falling month over month. As for other categories, the results were much weaker. Of the non-inputs to the optimism index, only three components were higher versus five that declined. Across indicators, the vast majority are historically low—many ranking in the bottom decile of readings—save for some labor market-related points like Job Openings Hard to Fill, Compensation, and Compensation plans. With that said, those labor indices are also well off highs from recent years, and as we discussed in today's Morning Lineup, the past few months have seen stabilization in these indicators.



Of those indices that saw improvement in September, the largest MoM jump was in expectations for higher real sales. That index jumped from -18 in August to -9 in September. That ties July for the strongest reading of the year, albeit it is also the 33rd consecutive negative reading in this index, a record streak. While sales expectations improved materially, actual sales changes have continued to deteriorate falling 1 point to -17. That ties last November and October for the lowest readings since the pandemic. As actual top-line results have been reported as weaker, actual earnings changes improved from -37 to -34 even as the higher prices index rebounded a couple of points. Granted, even with that improvement, actual earnings changes continue to see some of the weakest readings in this index since the Great Recession.



One other key area of weakness we noted in today's Morning Lineup concerned capex. Both actual and expected capex dropped in September. For plans, the index is down to 19 which is the lowest reading since April 2023 whereas actual capex at 51 hit its lowest since July 2022.



Finally, we would note that an auxiliary index to the report, the Economic Policy Uncertainty Index, is surging. This index tracking small business trepidation concerning economic policy typically rises during presidential election years; at that, those increases are usually far larger than non-election years. However, the 24-point leap over the past year through September is the largest YoY jump for that month of any year in the index's history, Presidential election year or otherwise, and the index itself is now at a record high. As we noted last month (see here and here), the NFIB survey typically has political sensitivities and the increasingly tight presidential race would make sense with that rise in policy uncertainty.

 

October Isn't Just Volatile in the US
Tue, Oct 8, 2024

It was a brutal overnight session for stocks in Hong Kong where the Hang Seng plunged 9.4% after Chinese stocks rallied less than investors had hoped after re-opening from the six-trading session National Holiday. Last night’s decline was the largest one-day decline for the Hang Seng since the depths of the Financial Crisis in October 2008 and before that two days in October 1997. Although stocks in Hong Kong were down sharply during the session, the Hang Seng is still up over 23% from its September low.



As mentioned above, the last four times that the Hang Seng has declined more than 9% in a day occurred in October. Including these four days, eight of the eighteen days that the Hang Seng has declined by more than 9% occurred in October. So while October is the most volatile month of the year for US stocks, the same applies to Hong Kong as well!

To illustrate this another way, the chart below shows a distribution of 5% one-day drops in the Hang Seng since 1964. Of the 132 occurrences, 20 occurred in October, and the next closest month is March with just 14.



October has not only been the champion of 5%+ daily declines, but 5%+ gains as well. Throughout its history, the Hang Seng has gained 5% or more 138 times, and 23 of those occurred in October which is more than 50% greater than the next closest month (November). Overall, October has been home to 43 (15.9%) of the Hang Seng’s 270 daily moves of at least 5%.

 

Election Update Part 1: Where the Odds Stand and What It Means


We have only four weeks to go to election day, although close to 2 million people have already voted, including close to half a million in states like Pennsylvania, Wisconsin, and Michigan. We figured this would be a good time to do an update on where the race stands, and what it means (or could mean) for the economy and markets as we move beyond the election. But first, let’s level set as to where we are.

2024 has already been an exceptional year, with the S&P 500 up 22% over the first nine months of the year. As Carson’s Chief Market Strategist Ryan Detrick pointed out, that is the best we’ve seen in any presidential election year since 1950. Perhaps it shouldn’t be entirely surprising given corporate profits are rising amid a solid economic backdrop. Employment is in a reasonable place, with recent data showing signs of stabilization. Real GDP growth was revised higher recently and is up 3% over the last year (as of Q2). Q3 GDP growth looks set to come in strong as well. As I wrote in my recent blog discussing September payrolls, income growth is powering the economy, as opposed to credit. Inflation has also come off the boil, with lower oil prices helping. That’s allowed the Fed to start cutting rates, an added tailwind for the economy and markets.

A note on the data: I mostly use Nate Silver’s (Founder of FiveThirtyEight) data in this blog because he has the longest (successful) election forecasting model, which included putting much higher probability on a Trump win in 2016 (29%) than other forecasters, and even prediction markets. A couple of others also have a good methodology but they are more recent, including Split Ticket and FiveThirtyEight (previously the Economist model). I’m setting aside the prediction markets and betting sites for two reasons. One, a good forecasting model has historically done better than prediction markets, on average. Two, for popular major events (including the Super Bowl), there’s so much recreational money and not enough “sharp money” to take it all off the table. The more “knowledgeable” bettors don’t dominate the pool, which means the information content from these betting pools are less predictive, more sentiment driven, and overresponsive to short-term news flow.

The Presidential Race – Looks Stable
There was a lot of volatility in the presidential race back in June (after the Biden/Trump debate) and then in July (when Biden stepped down). But since then, the race can be characterized by one word: stability. At least on the face of it. None of these major events really moved the numbers: the Democratic National Convention, third-party candidate Robert F. Kennedy dropping out and endorsing former President Trump, a presidential debate, and a vice-presidential debate. Vice President Harris has held a narrow but fairly steady lead against Trump in the polls, mostly ranging between 2.5-3%. Note this is less than Biden’s polling lead in 2020 (+9.8%) or Clinton in 2016 (5.0%) on October 8 according to Nate Silver’s polling average.



Despite Harris’s narrow but steady lead, the race is still a toss-up, with only a very slight edge to Harris. That’s because of the electoral college “bias” towards Republicans. The bias exists because Democrats typically run up the score in populous areas like New York and California. But key swing states like Pennsylvania, Wisconsin, Michigan, Nevada, North Carolina, Nevada, Arizona, Georgia are all polling within 1-2 points. Harris has a slight lead in the polls in the first 4 states, which would be enough to take her to victory.



However, a normal-sized polling error could result in one of the following:

• A Harris landslide (if we see an error similar to 2022 polls)
• A Trump win exceeding his narrow 2016 margins (if we see an error similar to 2020 polls)

Both are within very reasonable bounds of possibility. All three forecasting sites I referenced account for correlated errors (but in different ways). That means the “stability” of the race in the polls hides enormous uncertainty in the outcome. A shift in one direction in one state implies a somewhat parallel shift in many other states. That is why Harris has somewhere around a 55% chance of win (as of October 7), i.e. not far from a toss-up.

• Silver Bulletin: 55% Harris – 45% Trump
• Split Ticket: 57% Harris – 43% Trump
• FiveThirtyEight: 55% Harris – 45% Trump

A key point is that the above numbers DO NOT represent vote share (I see people making this error online all the time). A 55%-45% probability is not too far from 50-50 (pretty much the same, for all practical purposes).

At the same time, Harris is much more widely favored to win the popular vote, with Silver Bulletin putting the odds above 75% (I’ll come back to the relevance of this).

The Senate – Republicans Favored
Democrats currently have a majority in the Senate of 51-49. That means they can only afford to lose one seat and maintain a majority, assuming Harris wins the Presidency (the sitting VP gets the tie-breaking vote). Democrats are almost assured of losing Senator Manchin’s seat in West Virginia. Which means if they lose one more seat, Republicans take the Senate irrespective of who wins the White House. (It also means if Trump takes the White House, a Republican Senate majority is extremely likely.)

Right now, Montana is increasingly favored to go for Republicans, with Split Ticket putting an 82% probability of a Republican win. Democrats are almost as likely at this point to flip Nebraska, Texas, or Florida, so there’s a chance Democrats lose Montana and hold the Senate, but only on an extremely good day. Ohio is also looking very tight, with odds of 51-49 in favor of Democrats. As a result, Split Ticket currently has a 73% probability on Republicans taking the Senate, i.e. leaning Republican.



Taken from: https://split-ticket.org/senate-2024-ratings/

The House – Democrats Hold a Slight Edge
As I noted above, Harris is well favored to win the popular vote. That by itself means Democrats ought to have an edge in the House. Running up the score (or votes) in New York and California is not going to help Harris much, but it helps House Democrats. The fight for the House will likely be decided in these two states. Democrats currently lead in the “generic ballot” against Republicans, based on national polls that look at preference for a Republican or Democrat in Congress with no reference to a specific race. But the generic ballot lead is (you guessed it) narrow, with Democrats leading by just under 2%-points. This is why Split Ticket puts a probability of 56% in favor of Democrats taking the House. That’s only a very slight edge in favor of Democrats.



Split Party Control?
Based on current polls, and forecasts based on those polls, we could very well be looking at split party control of DC in 2025. That’s not a bad thing — especially if it means we’re unlikely to get big swings in policy, since presidents can’t “go big” with divided control. And that ought to be comforting for investors. As much focus as is on the Presidential race, control of Congress matters just as much. Here’s a nice chart from Ryan showing that a split Congress (House and Senate led by different parties) tends to be best for stocks, with average annual returns of 15.7%. Versus 8% when you have unified control.



Blue or red waves aren’t great for investors. Years with a Democratic President and Republican/split Congress and Republican President with a split Congress tend to be better for stocks.



Right now, it looks like odds favor split party control of Congress and the White House next year. That’s historically been positive for markets as you saw. Of course, it doesn’t mean a “blue wave” (Democrats sweep all three branches) or a “red wave” (Republicans sweep) is unlikely. The odds of either of these are not insignificant. Keep in mind that a sweep with a narrowly divided Congress acts a little like a split Congress, since each party’s most centrist members have a lot of influence.

Control of Congress is especially important this time around. That’s because we have a massive fiscal event, or cliff, at the end of next year. If Congress does nothing, a lot of elements of the Tax Cut and Jobs Act of 2017 (signed into law by former President Trump) expire on December 31, 2025. Most expiring provisions are on the individual side, but there’s some risk to corporate taxes as well. Keep in mind that 2026 is a midterm election year, and so it’s unlikely Congress will want to go into it having just raised taxes on households. In any case, Washington DC in 2025 is likely to dominated by tax policy related negotiations, getting ever more feverish as the deadline approaches.

In part 2 of this blog, I’ll discuss the main risks associated with a blue or red wave, and the potential big picture impact of tax policy on the economy and markets. Stay tuned.

 

Election-Year Octoberphobia Hangs Over Market



From one October day to the next, the market seems unable to decide which direction to go. Election-year Octobers going back to 1950 have been the worst month of the year, but in the last 21-years October has been fair ranking #4 for DJIA, S&P 500 and NASDAQ, #5 for Russell 1000 and # 6 for Russell 2000. And then there is October’s history of major market drops occurring during the month, hence Octoberphobia.

At today’s solid close, DJIA, S&P 500, NASDAQ, and Russell 2000 are all still in the red for October and appear to be tracking the typical election-year seasonal pattern. Russell 2000 is struggling the most, down 1.57% as of today. NASDAQ is least negative, down a small 0.03%. S&P 500 and DJIA are respectively off 0.20% and 0.59%. Should the market continue to track past election years, more sideways chop is likely heading into mid-month. A more decisive move lower in the second half of the month, ahead of Election Day, cannot be ruled out.

Geopolitical tensions are at or near the top of the list of market concerns as Israel’s response to Iran’s latest missile attack is still awaited. Last Friday’s much better than expected jobs report has sent the 10-year Treasury yield back above 4% rather effectively quashing expectations of another large Fed interest rate cut. Inflation readings later this week, CPI on Thursday and PPI on Friday, remain important, but barring a wild miss could fail to move the market considering how solid employment data has been.

 

Happy Second Birthday to the Bull Market


“The whole problem with the world is that fools and fanatics are always so certain of themselves, and wiser people so full of doubts.” – Bertrand Russell, British philosopher

First things first — our thoughts go out to everyone that has been impacted by Hurricane Helene and those in the path of Hurricane Milton. If there is anything Carson Group can do, do not hesitate to reach out and stay safe!

The Bull Is Young
This Saturday marks the official two-year birthday of the bull market that stared on October 12, 2022. That was a vicious 25% bear market made worse by also having some of worst bond market performance ever. As long-time readers know, Carson Investment Research has been on record since November of 2022 that the lows were indeed in and prices were going higher, and that the economy would surprise to the upside and avoid a recession. Two years later, we are still saying it .

To be bullish two years ago (and most of 2023) was quite an experience, since any optimism was widely greeted with scorn. The quote above from Bertrand Russell perfectly fits the permabears, who were so certain of a recession and bear market in early 2023, only to see the complete opposite to occur.

I’ll never quite understand why so many people were bearish, and almost seemed to take joy in rooting for bad things to happen. But fortunately instead we have stocks up more than 60% from those lows and an economy that appears to be warming up, not slowing down.

Want some more good news? This bull market is actually quite young. That’s right, a two-year bull market historically has plenty of life left, with the average bull market since 1950 lasting more than five years and gaining more than 180%. How long this bull will last is anyone’s guess, but we remain in the camp that looking out the next six to nine months we simply don’t see any reason to expect a recession or end of the bull market. Will it last another three years? All we will say there is the odds are better than many expect.



A year ago at this time we noted that previous bull markets that made it to one year made it to year two every single time except the post-pandemic bull, and even that one saw a gain of over 100%. Remember, a year ago right now we were told by many that a weak first year to a bull market suggested the end was near, as stocks were barely up more than 20%. We noted this was probably the wrong way to look at it and suggested being open to the possibility of huge gains in year two. Well, after more than 30% gains during the second year of the bull market we would say that indeed was the way to look at things.

Will this bull market make it to three? We think so, but history would say we should temper our expectations for another 30% gain. We found that out of 16 previous bull markets (after bear or near bear markets), 12 of them made it to their third birthday, with an average gain of about 8% and a median return of nearly 10% in year three, pretty much what your average year does. All in all, we expect stocks to be up at least low double digits over the next year and this study does little to change that view.



Some Bad News
As we laid out last week, October can be volatile and historically the S&P 500 hasn’t done well in October during an election year. The good news is November and December tend to be quite strong after the October seasonal weakness. Turning to times the S&P 500 was up at least 30% the previous 12 calendar months heading into October, there is reason to be on the lookout for some near-term weakness, as stocks fell five out of six times. But it is noteworthy that outside 1987, the S&P 500 did make gains the final two months of the year.



Some More Good News
Big picture though, the underpinnings that got us to new highs and huge gains the past year are still alive and well. We might sound like a broken record, but this is still a bull market, we believe there is not a recession coming, and any weakness should be fairly contained and eventually bring higher prices.

One reason to expect higher prices over the next year? The S&P 500 is up five months in a row. That’s right, it turns out that five-month win streaks tend to happen in bull markets and higher future prices are the hallmark of bull markets.

Going all the way back to 1950, we found 29 other five-month win streaks and stocks were higher a year later 28 times, for a win rate of nearly 97%. Yes, this is just one signal and we would never suggest investing based on a single data point, but looked at in the context of all the bullish signals we continue to see, it further reinforces our overall bullish stance.



Conclusion
So many investors were tricked into believing the constant doom and focused on things like yield curves, LEIs, PMIs, weak breadth, and many other scary sounding warnings, all of which ended up being completely wrong the past two years. Hopefully if you are reading this, then you’ve been on the right side of what has been a tremendous two years for investors. We thank you for reading our research and we will continue to give an honest (and maybe not always in consensus or popular) take on what is really happening out there.

 

Traders Much Less Enthusiastic Now Versus 2021
Thu, Oct 10, 2024

This week we got an update from the Schwab Trading Activity Index, also called the STAX. We initially covered this data in Tuesday's Closer for subscribers, but we also wanted to highlight it here on Think BIG.

Whereas most investor sentiment readings like the AAII survey directly ask investors how they feel about the market, indicators like the STAX are derived by measuring what retail investors are actually doing in their accounts. In September, Schwab's Trading Activity Index fell to 47.1, which is the lowest reading since January. That drop occurred even though the stock market continued to rally to new all-time highs.

The STAX data dates back to 2019, and as shown below, the index surged in late 2020 through late 2021 during the first post-COVID bull market when Americans were flush with stimulus cash and were actively bidding up pretty much everything that traded! At the time, the STAX index saw record highs with readings above 75 in June and November 2021. November 2021 was ultimately the peak for growth stocks before the bear market of 2022.

Notably, there's a big difference between the STAX reading now versus 2021. The stock market is currently up 60%+ off the late 2022 lows and has registered 44 all-time highs already this year. Similarly, the market was also making a new high after a new high back in 2021. During this year's rally, though, the STAX has remained quite subdued compared to going gangbusters in 2021. This tells us that there's less complacency, enthusiasm, and overall interest in the market right now versus 2021 levels, which is good if you're a long-term bull.



The Schwab STAX index was established in 2019, but before TD Ameritrade's acquisition by Schwab, it had a counterpart index called the Investor Movement Index that featured data dating back over a decade. Standardizing the two indices shows they've had comparable readings with only minor discrepancies. As mentioned earlier, current sentiment levels are much more depressed than at the time of past record S&P 500 highs like in 2020/2021 and 2017. During those periods, these trader activity indices were well over 2 standard deviations above the historical average. Right now, they're basically neutral, meaning retail investors are neither overly bullish or bearish.