What is the Truth about October Markets?

Robert Maltbie |

The truth about October is not about crashes, although it is infamous for a couple notable crashes. Actually, the reality of October is that it's not a bad month for investors. On average, it's up about 40 basis points on balance and is the first month of the best quarter of the year. What affects October and makes it more volatile sometimes is that it's the year-end for mutual funds, and they're selling their losers, which causes a downdraft for the market.

Looking at Singular Research's main indicators as we head into the core of earnings season, our indicators are neutral, but that is up from bearish. So that's moving in the right direction. Now, we're cautious because on a technical basis we've got a mixed picture and all important market indices are below their 200-day moving averages. They need to break above that resistance for us to have a serious advance.

The focus is on earnings per share where we have a situation of bifurcation. We're going to have some really good earnings as well as some really bad earnings. They're going to skew good and very ghoulish. The good earnings should be in Consumer Discretionary, which is projected to be up 9%. No surprise, the downside will be in Energy, which is projected to be down 64% year-over-year, pulling the whole earnings season down.

Our liquidity indicators are net positive, led by corporate activity, M&A, and buybacks. But now, over the last several weeks, the public is starting to flow back into equities. We had a positive $5 billion last month flow into mutual funds and ETFs.

For us, the key to valuations is looking at book or historical replacement value. On that basis, this market is about par, which is good. The earnings yield on the stock market is above the yield on the corporate bond market, so that's why we're getting a lot of these M&A and buybacks because the economics are still there.

We also look at the GDP, and on that basis, the market looks just a little bit rich. So we have this picture that skews just a little bit positive.

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