Welcome to the latest episode of my monthly YouTube show where I discuss what is happening in investment markets and what to look out for. This month I explain the effect that seasonality has had on investment markets.
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Abridged transcript - Damien's Market Update - November 2022
It has been another eventful month in investment markets. If you recall the weakest August performance for US stocks since 2015 was swiftly followed by the worst September since 2002. As mentioned at the time, September is historically the weakest month of the year for most equity markets, and history certainly repeated with the S&P 500 falling by an incredible 9% during September 2022.
Seasonality has had a significant influence on investment markets recently. Much like a weather forecast, seasonality doesn’t determine the actual weather (in this case investment performance) you experience on a given day, but it does provide context of the likely range of outcomes. But just like the weather, investment market performance is unpredictable, and can surprise us. You can extend the metaphor and talk about droughts or hurricanes or periods of time when events are outside of expectations.
But as we headed into October investors hoped seasonality might once again have an influence on market returns. That is because typically October is one of the strongest months for US equity returns, especially during a US midterm election year such as 2022.
In fact, October started with the best 2-day start to a month ever for the S&P 500 as investors panicked that they might miss the bottom of the market and piled in. The prevailing narrative became that, given that the Bank of England had pivoted somewhat by restarting Quantitative Easing then the US Federal Reserve and other central banks would surely follow suit?
But the initial FOMO (fear of missing out) which was driving equity markets globally started to fade and many equity markets either revisited their 2022 lows or came close to doing so by mid-October. However, positive seasonality then exerted its influence especially in the US where the Dow Jones had its best October ever and its best monthly performance of any month in over 26 years. A buy-the-dip mentality returned to US equity markets in the second half of October, and we even saw sector rotations which are usually what sustained market rallies are built upon.
The Dow Jone rose almost 12% in October, while the S&P 500 rose 8%. The German DAX, which is often closely correlated with the fortunes of the S&P 500, rose 8% too. But the euphoria wasn’t seen across all equity markets, with Asian and emerging markets falling into negative territory during October, largely because of a 16% slump in Chinese equities following Premier Xi Jinping's renewed grip on power and continued covid lockdowns. In the UK, equity markets eventually managed to drag themselves into positive territory despite the mayhem caused by the former Prime Minister Liz Truss and the now infamous mini-Budget.
One of the potential headwinds for investment markets during October was the latest corporate earnings season, where companies revealed their Q3 earnings and provided updated outlooks. While earnings season posed a potential banana skin, investors took disappointments in their stride, especially from large US tech stocks.
Meta (formerly Facebook) was rocked by a drop in advertiser spending in the face of a global economic slowdown. In the immediate aftermath of the announcement the company’s share price tumbled more than 20%. Alphabet also saw its shares fall 8% after it announced its own slump in advertising revenues.
Not to be outdone, Amazon shares slumped 20% after reporting its revenue numbers and warned of far weaker sales figures in the upcoming festive period. Such wild swings in share prices are what you’d expect of penny stocks, not mega cap stocks. But should we be surprised by anything in 2022?
While individual tech stocks sank, dragging the Nasdaq 100 with them, it wasn’t enough to derail the wider market. It means that corporate earnings season has, on the whole, been well-received partly a result of the low-bar of expectation but also because of how oversold stocks had become by mid-October.
Heading into November, a prevailing buy-the-dip mentality remained in control but the equity market euphoria and to a certain extent, the relief rally in bond yields, largely in the absence of any central bank policy decisions during October, suggested the stage was set for either a significant move higher or a huge disappointment. The catalyst was always likely to be the central bank policy decisions from the US Federal Reserve (the Fed) and the Bank of England in the first week of November. But most of the attention was placed on the Fed, and whether the market had jumped the gun with its dovish pivot narrative that had been driving a lot of the recent market moves.
In the end both central banks raised interest rates in line with market expectations, but more importantly we saw a more hawkish than expected press conference from Chair Jerome Powell. This resulted in a pullback in equity markets, especially in the US where on the day domestic markets fell 2-3%.
But in an interesting twist, equity market performance so far in November has been the inverse of October’s, with US equities struggling and emerging markets rallying.
It reflects the 360 degree change in narratives surrounding both regions. In October, covid lockdowns helped contribute to a slump in Chinese equities, dragging down emerging markets while in November rumours are now circulating that China might finally remove restrictions which would obviously be a boost for its economy. Meanwhile, in the US the second half of October was characterised by a narrative that the Fed would pivot and become more dovish, when the reality in November has been that the Fed is sticking to its hawkish course.
Both of these narrative are in a state of flux and it just emphasises the level of volatility we are seeing in investment markets.
Other hurdles for November include the US midterm elections, although the actual outcome is often less important than AN actual outcome… something I will explain in more detail to 80-20 Investors this week. We are also going to find out new inflation data, which is being eagerly awaited, especially in the US. If inflation data continues to come in higher than expected it is likely to be bad news for bonds and equities once again.
But there are reasons to be cheerful. We are entering the best 6 months of the year for stocks markets and if seasonality continues to influence markets then November should be a positive month for US stocks, especially as it's a midterm year. Usually that translates to other equity markets globally but as October proved, that hasn't always been the case recently.
With so much uncertainty I will leave you with some technical analysis numbers to keep an eye on, which I have taken from my latest research article on 80-20 Investor. For the S&P 500 keep an eye on 3900-3925 in the short term as this is a level that needs to be overcome if the rally that started in late October is to continue. While on the downside 3580, marks the recent 2022 bottom so remains important to hold if things aren’t to unravel further. In the UK we want to see the FTSE 100 recapture 7300 (which is also where its 200 day moving average lies) while to the downside there are numerous lines of support with 7000 being a psychologically significant one.
