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October Market Wrap: Better Than Anticipated But Keep An Eye On Developing Risks

Published 11/01/2021, 06:28 AM

One could sense growing unease among traders and investors after September's late month pullback, as worries escalated regarding what October might bring.

Indeed, there was much to be concerned about: rising inflation; accelerating interest rates; increasing global tensions and tense domestic politics. Stock markets at least needn't have worried. Equity indices saw their best gains since 2015 during October.

New Highs For 3 Major Indices, Some Tech Mega Caps

The S&P 500 Index, Dow Jones Industrial Average, NASDAQ Composite and NASDAQ 100 indices all finished the month at new 52-week and closing highs.

SPX 300 Minute Chart

The S&P and NASDAQ had their largest monthly gains since November 2020. The Dow's rise was its second best since November 2020.

Thanks to a 17.6% gain for the month, Microsoft's (NASDAQ:MSFT) market capitalization became the biggest among U.S. companies, surpassing that of Apple (NASDAQ:AAPL)—$2.49 trillion to $2.476 trillion.

Apple warned Thursday that supply-chain issues continued to disrupt operations. Microsoft reported widely admired results and guidance.

MSFT 300 Minute Chart

Result: Microsoft's market cap topped Apple's as the Redmond, Washington-based software and infrastructure giant seemed better able to cope with the pandemic.

Electric vehicle-maker Tesla (NASDAQ:TSLA) finished the month up 43%. The company saw its market cap top $1 trillion for the first time, joining the elite ranks of Microsoft, Apple, Google parent Alphabet (NASDAQ:GOOGL) and Amazon (NASDAQ:AMZN).

All this occurred irrespective of rising oil and gasoline prices that have been gaining steadily since early 2020, and the previously mentioned global supply-chain issues, rising inflation worldwide and a difficult political environment.

Plus, a stock pullback on the final Wednesday of October that seemed to have been triggered by investors nervous about risk, moving into longer-term bonds to lock in yield.

3 Powerful Forces Kept Stress Low During The Month

Nevertheless, three powerful forces helped markets avoid serious stress in October:

  • The Federal Reserve has been clear it will raise interest rates next year. But the central bank isn't going to raise rates rapidly. We'll hear more about the Fed's plans this week when it is expected to announce plans to trim back its gargantuan purchases of bonds. The Fed's bond purchases put cash into the economy to combat COVID-19 effects and drove the 10-year Treasury yield to as low as 0.6% in 2020 before yields started to recover. The yield hit 1.72% in April but finished October at 1.56%.
  • Unemployment levels have been coming down since peaking at 14.8% in April 2020 as the pandemic erupted.
  • The U.S. economy was able to grow as businesses took advantage of the opportunities created by having millions of people work from home. That was great for computer makers, chip makers and software developers. And manufacturers and companies such as Amazon, Target (NYSE:TGT) and Costco Wholesale (NASDAQ:COST) were able to adjust their business models to cope. (OK, survive.)

Add to that: strong third-quarter profits so far. Some 80% of profit reports released during the current earnings season have beaten estimates. Sales figures also mostly beat estimates, adding to investor bullishness.

In short: Inflation? So what? That's the attitude from investors, at least for now.

But price pressures are still there. Oil prices rose more than 10% in the month, with West Texas intermediate crude finishing at $83.57 a barrel. Crude is up 72% this year largely because the population seemed to work around the pandemic.

Gasoline prices, however, which traditionally fall in the autumn, are still rising. AAA's Daily Fuel Gauge report showed the national average at $3.401 a gallon on Sunday, up 6.6% for the month and 51% for the year.

Energy stocks were among the market's strongest sectors.

Copper, a key industrial metal, jumped 6.82% to $4.358 a pound in October and is up 24% year-to-date.

And Bitcoin continues to shine. The cryptocurrency was at $60,058 on Sunday, up 38% for the month and already starting to attract money into an array of new exchange-traded funds based on BTC futures trading.

October winners and losers

Helping fuel the October surge has been investor interest in transformative technologies.

TSLA 300 Minute Chart

Hence solar-energy technology company Enphase Energy (NASDAQ:ENPH) and Tesla were the top S&P 500 performers in October, up 54.5% and 46.6% respectively. The top performers also include Teradyne (NASDAQ:TER), graphics chip maker NVIDIA (NASDAQ:NVDA).

Tesla was the star of the index after auto rental company Hertz (OTC:HTZZ) agreed to buy 100,000 Tesla vehicles by the end of 2022. The deal pushed Tesla shares up 22.5% last week alone. Hertz rallied 25.6% on the week.

But three railroads were also among the top S&P 500 performers: Union Pacific (NYSE:UNP), Norfolk Southern (NYSE:NSC) and CSX (NASDAQ:CSX), all up better than 20% each. The stocks are benefitting from all the attention being paid to supply-chain crisis.

A big decliner among tech-related shares was Meta Platforms, the new name for Facebook (NASDAQ:FB).

FB 300 Minute Chart

Shares were down 0.3% on the week and 4.7% for the month, on top of a 10.4% decline in September.

The new name is ostensibly meant to reflect CEO Mark Zuckerberg's decision to invest in the Metaverse, which The Wall Street Journal defines as "an online virtual realm where people would work, play and shop." Facebook will change its ticker to MVRS on Dec. 1.

A far larger problem for the company: the massive disclosures by a whistleblower of internal documents showing massively flawed oversight in many of its social-media platforms. FB shares peaked at $384.33 on Sept. 1 and are down 15.8% since. But they're still up 18% on the year.

Health-insurance giant UnitedHealth Group (NYSE:UNH), Microsoft and pharma-giant Merck (NYSE:MRK) (also a COVID-19 vaccine supplier) were the top Dow stocks. Apple, up a respectable 5.89%, placed 12th for the month on the 30-component index.

But traditional tech giants IBM (NYSE:IBM) and Intel (NASDAQ:INTC) struggled during October, falling 9.95% and 8%, respectively. Aerospace giant Boeing (NYSE:BA) was off 5.9% on the month because of issues involving its 787 Dreamliner.

COVID worries, cancelled flights and sharply higher fuel costs weighed on airlines as well. American Airlines Group (NASDAQ:AAL) fell 6.4%. Alaska Air Group (NYSE:ALK) swooned 9.9%. Southwest Airlines (NYSE:LUV) dropped 8.1%.

The risks ahead

Despite a bullish month for stocks and bullish earnings so far, there are risks to consider.

Will the Fed surprise on Wednesday with a more hawkish turn on inflation? Not likely, but the inflation pressures that Fed Chairman Jerome Powell thought would be transitory have proved to be anything but. Worker shortages are considerable, and demands for more pay are at the heart of the problem.

Moreover, the fantastic appreciation of home prices in recent years is causing pressures. Plus, beating down the housing market carries huge risks.

Is growth slowing, particularly in the United States? Last Thursday's gross domestic product report suggested it is. Third-quarter growth was 0.5%, the Commerce Department said, lower than expected and down from 1.6% in the second quarter.

Upcoming gubernatorial elections in Virginia and New Jersey may have a tremendous spillover effect on the 2022 election and beyond. The Democrats are barely hanging on to a slim majority and can't seem to get their spending plans in place.

In addition, Axios and NBC News, as well as others, reported Sunday that President Joseph Biden's polling numbers are weak, and Donald Trump is desperate to reclaim the White House.

Global tensions are rising, particularly with China and Taiwan. China wants Taiwan. Taiwan wants its ally the United States to defend it.

A parallel issue starting to play out—the global climate change meeting which began over the weekend. While everyone wants action on global warming, no one wants to give up anything to get it, to the rage and disappointment of climate activists.

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