Market Update October 2022 – Strength in Numbers?
The global rally on October 4th was a welcome reversal to this year’s trend in the equity markets. The catalyst appears to have been the U.K. government’s reversal from plans to cut the income tax rate for the highest income earners. What a reversal in policy thinking it is! Whether looking back to 2009, 2011, 2012, 2015, 2018 or 2020, economic and capital market volatility have all been met with the same prescription from the authorities: “Stimulus”. Either through fiscal support or monetary easing, officials applied overt or covert “stimulus” of one sort or another with hopes of smoothing out economic health.
But now, policy has shifted towards fighting inflation, knowing that there will be a cost. And this shift has been evident in the capital markets with rising interest rates and falling prices for both bonds and equities. How long will might this transition period last? Predicting market outcomes is seldom worthwhile. But investors can look at past experiences for context, even knowing that history is not a guarantee of tomorrow.
The accompanying chart looks to the market activity associated with October 3rd and 4th for context. During these first trading two days of October, the S&P 500 Index rose 5.7% and small caps (Russell 2000 Index) rose 6.7%. (Global and emerging markets also participated on the upside.) While we won’t look to predicting markets, we do look at investors’ behavior for clues regarding what might be next. Interestingly, the early October gains did offer up certain characteristics that haven’t been common. Looking at the accompanying chart of the S&P 500 Index, the bottom clip shows the net number of index members that have risen, less those that declined. As one can see, on any given day the net advancing/declining data can vary widely. But rarely does it hit a point with such a high level of net advances (horizontal green line) as was seen on October 4th: 491! Along with October 2022, the vertical red lines represent the eight times since 2008 that this level of net-advancers has been reached.
While extremes can be a warning, they can often represent a transition, such as 2012 and 2019. But this picture of history also suggests that these conditions as seen in 2010, 2011 and 2018 can coincide with a bottoming period following a decline in equity markets.
As much as the investment community would like to know of that signal which points to “what’s next”, at best, we can look to market and economic history for context that can be applied to today’s conditions. As seen in the chart, each of the highlighted periods experienced unique aspects, but the general message this date promotes may be one vote for optimism.
Chief Investment Officer
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