October keeps rockin’

After the stock market kicked off October with its biggest two-day rally since April 2020, it one-upped itself last week by staging its largest intraday rebound since March 2020. This time, though, it wasn’t quite enough to send the market to a second-straight up week.

After Thursday morning’s Consumer Price Index (CPI) report, the S&P 500 (SPX) fell more than 2% in the opening minutes of trading to hit its lowest low since November 2020—and reach the 50% retracement level of its March 2020–January 2022 rally. But it almost immediately pivoted to the upside and, after a 5.6% intraday turnaround, ended the day with a 2.6% gain. A 2.4% downturn on Friday gave back most of that gain, though, and dropped in the index into the red for week:

The headline: Stocks rock, roll around inflation data.

The fine print: The market’s gyrations around last week’s inflation numbers may have struck some traders as out of proportion to the data itself. Stocks closed lower on Wednesday after a slightly warm Producer Price Index (PPI) report, while Thursday’s huge intraday reversal followed a similarly middle-of-the-road core CPI reading: Year-over-year consumer prices (minus food and energy) increased 6.6% in September (above estimates and higher than August’s 6.3% reading), but the month-over-month increase was unchanged at 0.6%.

The move: Thursday was one of only nine days in the past 40 years—and the first one since 2011—that the SPX fell 2% or more intraday and rallied to close at least 2% higher. Four of the nine days occurred during the 2008 financial crisis.

The scorecard: The Dow ended last week higher, while the Nasdaq 100 (NDX) tech index fell the most, weighed down in part by heavy selling in semiconductor stocks:

Sector roundup: The strongest S&P 500 sectors last week were consumer staples (+1.7%), health care (+1%), and financials (+0.4%). The weakest sectors were consumer discretionary (-3.9%), information technology (-2.9%), and utilities (-2.6%).

Stock movers: Dice Therapeutics (DICE) +62% to $40, and ForgeRock (FORG) +49% to $22.52, both on Tuesday. Owens & Minor (OMI) -35% to $15.1 on Wednesday, Relmada Therapeutics (RLMD) -80% to $6.48 on Thursday.

Futures: December WTI crude oil (CLZ2) lost ground every day but Thursday to end the week down more than $7/barrel at $84.65. December gold (GCZ2) also retreated, closing the week down more than $50/ounce at $1,648.90. Week’s biggest up moves: November lumber (LBSX2) +10.5%, December hogs (HEZ2) +6.6%. Week’s biggest down moves: December silver (SIZ2) -10.3%, December coffee (KCZ2) -9.8%.

This week’s numbers include:

●Monday: Empire State Manufacturing Index
●Tuesday: Industrial Production and Capacity Utilization, NAHB Housing Market Index
●Wednesday: Housing Starts and Building Permits, Fed Beige Book
●Thursday: Existing Home Sales, Leading Economic Indicators Index
●Friday: Inflation Expectations

The first full week of earnings season includes more banks, airlines, and Netflix:

●Monday: Bank of America (BAC)
●Tuesday: Signature Bank (SBNY), United Airlines (UAL), Goldman Sachs (GS), Johnson & Johnson (JNJ), Netflix (NFLX)
●Wednesday: WD-40 (WDFC), ASML (ASML), Abbott Laboratories (ABT), Lithia Motors (LAD), Procter & Gamble (PG)
●Thursday: Dover (DOV), Fifth Third Bancorp (FITB), AT&T (T), American Airlines (AAL), Union Pacific (UNP)
●Friday: American Express (AXP), Simply Good Foods (SMPL)

Check the Active Trader Commentary each morning for an updated list of earnings announcements, IPOs, economic reports, and other market events.

It’s still too early to know how Q3 reporting season will pan out, but if forecasts turn out to be correct that earnings growth could be the weakest since Q3 2020,¹ it may not be such a bad thing, according to Morgan Stanley & Co. analysts.

In short, they believe the market still needs to factor in the likelihood of lowered growth and earnings before the bear market can find a bottom.² The “good” news: They see indications that earnings estimates for next year—which they argue remained too high for too long—may finally be coming back to earth. Many companies have either reported (or preannounced) earnings and guided significantly lower for Q4.

But they added that it’s still uncertain how much of this will get worked out during the current earnings season vs. in Q4 reporting season early next year—something that could keep market volatility elevated in the near term.

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¹ FactSet. Earnings Insight. 10/7/22.
² MorganStanley.com. Earnings Begin to Guide Lower. 10/10/22.