Investor resting on cash reserves
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The 10% liquidation of the stock market seems like a full-blown correction. Therefore, Monday's (October 30) bullish reversal (and the calmer days ahead) could be taken as evidence that the sell-off is over.
However, the negative issues that led to the liquidation remain. Therefore, seeing this new period as a pause could avoid becoming optimistic too soon.
So why the pause now?
The stock market has passed October with some blows, but without scaring investors. Therefore, the happier backdrop of the November-December holiday period could keep investor sentiment relatively neutral, if not positive.
Additionally, there are five important fundamental developments that could brighten the mood:
First: Company Earnings Reports (October 30-November 10)
These two weeks of reports are well diversified across economic sectors and business industries. Here is the proportion of indexed companies that report:
- S&P 500 = 207 (41+%) companies
- Nasdaq 100 = 41 (41%) companies (33 are also in the S&P 500)
- Russel 2000 = 932 (46+%) companies (none are in the other two indices)
Therefore, 1,147 (more than 45%) companies are reporting out of a total of 2,517 across the three indices, and the dispersion of results and outlook will reduce some of the widespread concerns, such as high interest rates. If most reports are good, indices could rise
Second: Federal Reserve announcements (November 1)
The interest rate decision and the accompanying commentary and outlook will likely reassure investors.
Third: "Bureau of Labor Statistics (BLS) Employment Status Summary Report" (November 2)
This important report will likely confirm the continuation of strong employment conditions and low unemployment.
Fourth: University of Michigan Consumer Sentiment Report (November 10)
The results of this survey are a widely followed measure of consumer sentiment, for both current and expected conditions. With the good retail sales and employment reports, this preliminary November report is expected to be positive.
Fifth: BLS Consumer Price Index (CPI) Report (November 14)
Key inflation data (particularly for "core CPI" which excludes food and especially variable energy prices) will likely show a trailing 12-month figure for October that is similar to September.
Bottom line: relax for now, but it's too early to be optimistic.
Just because we have been hearing about the negative aspects of the economy and business for many months does not mean we should ignore them. However, understand that those problems were behind the three-month stock market sell-off and have not gone away.
Instead, expect less turbulence in the stock market for a while. The topics mentioned above are stepping stones to the generally positive holiday period. Then come seasonally weak first-quarter sales, production and employment.
Looking that far away is always doubtful. Any scenario is full of probabilities and expectations that could change. However, there is one serious outcome that is still set to play out in the future: a harrowing decline that will reset stock market valuations and investor expectations, particularly among the favorites of the last bull market. It would be the second of the four stages I described in my October 25 article below (stage one, a disturbing sell-off, is now complete).
