Market Sentiment Appears to be Positive as Volatile October Gives Way to New Month

After a shaky October, the market seems to be on firmer footing to start November.

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Key Takeaways

  • The Bank of England left rates unchanged
  • Apple reports earnings after the close

  • The government’s jobs report is due out tomorrow

(Thursday Market Open) After a shaky October, the market seems to be on firmer footing to start November.

The U.S. market appears to be on track for another day in the green. But it doesn’t seem like anything has fundamentally changed from the volatility we saw in October. So it would likely behoove investors to not get complacent.

U.S. equity index futures were pointing to a higher opening after Asian and European shares were mostly in the green overnight. The Bank of England left rates unchanged, as widely expected. However, the pound has been climbing over the last 24 hours as Brexit Secretary Dominic Raab says he expects a deal by November 21.

On Wednesday, positive momentum appeared to spill over from Tuesday and gave investors a treat, instead of a trick, during the Halloween trading session where all three of the major U.S. indices ended firmly in the green.

The information technology sector yet again proved to be a leader—as it has been on the way up and the way down recently—with the sector gaining nearly 2.4% and the tech heavy Nasdaq Composite (COMP) rising more than 2% compared with gains around half that for the S&P 500 (SPX) and the Dow Jones Industrial Average ($DJI).

The financial sector also had a hand in the day’s rally as interest rates rose following data indicating a robust labor market. (See a trio of jobs-related commentary below.) The reports were among a string of strong economic data recently that have helped boost yields as market participants appear to be selling Treasuries because some might see less need for the investments that are often considered defensive. Strong economic data also point toward chances of another Fed rate hike before the end of the year as economic policy makers attempt to keep the economy from overheating.

Playing Defense

So it perhaps wasn’t that surprising that so-called “defensive” stocks—consumer staples, real estate, and utilities—were the only sectors that declined Wednesday.

Still, each of these sectors has outperformed the S&P 500 over the past month. This could give some investors food for thought if October’s volatility continues into this month as these sectors appear to offer the potential to be a hedge against market swings.

Volatility May Not Be Over

If you’re an investor still concerned about the potential for more market swings, you’re not alone. Although the Cboe Volatility Index (VIX) fell markedly Wednesday, it is still at an elevated level we haven’t  seen in months, likely indicating that investors expect volatility to continue.

So it could be too much to expect that Wednesday’s momentum rally and this morning’s positive sentiment means the market is out of the woods. Midterm elections in the United States are just days away. International trade issues haven’t gone away. Nor have tensions around Italy’s budget or Brexit negotiations. Headlines on any of those issues could be a catalyst for selling. Plus, the Labor Department is releasing its monthly jobs report tomorrow.

It’s also probably worth keeping in mind that Wednesday’s rally could have been helped by end-of-month position squaring. That could have involved traders buying back short positions. If so, that would arguably be less supportive for the market in the long run than more fundamental support such as company earnings.

Can Apple Maintain its Polish?

Speaking of company earnings, Apple (AAPL) is scheduled to report its fiscal fourth-quarter earnings after the closing bell today. With yesterday’s jump of more than 2.6%, the stock is looking polished with a year-to-date gain of nearly 30%.

AAPL isn’t that far from an all-time high hit recently. And with a series of upgrades, no sell ratings and hold ratings dropping steadily since the last report, AAPL has a lot of positive sentiment to live up to today. 

For fiscal Q4, AAPL is expected to report adjusted earnings per share of $2.78 on revenue of $61.57 billion, according to third-party consensus analyst estimates. AAPL’s own guidance calls for revenue of $60 billion to $62 billion, gross margin of 38% to 38.5%, and operating expenses of roughly $8 billion. 

FIGURE 1:  VIX Pulls Back, But Watch Yields: Volatility, as measured by the VIX (candlestick), has pulled back over the last few days but remains above 20, which is historically a bit high. At the same time, the 10-year Treasury yield (purple line) has begun edging up again amid strong earnings and economic data. Data Source: Cboe. Chart Source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.

Previewing Jobs Numbers: The government’s monthly payrolls data Friday could garner a lot of attention, as these jobs reports tend to do. Now appears to be an especially sensitive time as the economy hums along but there are some signs of inflation (see "rising labor costs" below). There’s a bit of a sense that Friday’s report needs to thread the needle. If it shows jobs growth that is ahead of expectations, that could point to good times for the economy, but Wall Street could react negatively out of worry that the Fed might tighten rates too much. If the jobs report is weaker than expected, that could boost some stocks, but in the longer run it could prove a negative for the economy and eventually weaken cyclical stocks that do well when the economy does well. According to a Briefing.com consensus, economists are expecting October non-farm payrolls to rise by 190,000 positions, average hourly earnings to rise 0.2%, and the unemployment rate to be unchanged at 3.7%.

Rising Labor Costs: On Wednesday, the market got two snapshots of the labor market ahead of Friday’s big payrolls report. One was the government’s quarterly employment cost index (ECI), which rose 0.8% as wages and salaries jumped 0.9% and benefit costs rose 0.4%. For the year ended in September, wages and salaries rose 2.9%. As we’ve been noting in this column, the current labor market is tight, which could arguably be a reason behind rising wages. So it could be interesting to see whether Friday’s jobs report shows higher-than-expected wage growth. “The key takeaway from the (ECI) report is that it corroborates a trend of rising compensation costs for civilian workers that have been discussed by employers and which have kept the Federal Reserve on a tightening path,” according to Briefing.com.

History Repeating? The other peek into the jobs market came from the monthly private-sector payroll report from Automatic Data Processing (ADP) and Moody’s Analytics. On Wednesday, the numbers showed 227,000 new private-sector jobs were created in October, a much-stronger-than anticipated reading. That, coupled with a big gain in September, “adds to the upside risk for Friday’s jobs report,” said investment research firm CFRA. It’s probably worth keeping in mind that the ADP report’s methodology doesn’t account for people displaced by adverse weather. Recall that the September ADP report came in much stronger than expected but the government’s report fell short of forecasts. Still, even Wednesday’s downwardly revised ADP figures for September were above original forecasts. “Both the ADP and ECI reports suggest a tight labor market and a firm path for GDP, despite ongoing hurricane disruptions,” CFRA said.

Good Trading, 

JJ

@TDAJJKinahan 

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