Harsh is in the jungle this week... no, not the concrete jungle of London, the actual jungle in South America 😱
So while Harsh is fighting off snakes on a plane (we hope not), I'll be breaking down this weeks market news for you.
You've probably heard of the October Effect (psst - we wrote about it in 'The Library', link here), as a quick recap, it's like the Halloween of the stock market where some investors believe the month is somehow forever cursed, since some of the large historical crashes occurred during this month.
But, what goes down must come up - in theory 😉In practice?
Over the past 70 years, the Dow Jones Industrial Average and S&P500 (two of the most well known indexes - to recap what an index is click here) have always risen at least 5% over Nov and Dec after ending October on a high. Christmas just came early 🎅
To delve further into this, the Dow Jones Data Group data going back to 1950 shows that when the Dow Jones Industrial Average and the S&P500 index close out October with a sizeable gain, like the gain they had this year, positive returns for the rest of the year are more than likely.
More specifically, when the Dow is up by at least 15% for the calendar year through to the end of October, the index usually gains an average return of 5.55% over the next two-month period. This gives the Dow an average year-to-date return of 27.17%. Good news, the Dow just finished October up 15.94%!
Similarly, when the S&P500 has gained at least 20% through to Oct 31 (it closed up 21.17%) the average return is 6.21% on for the rest of the year. That means the S&P500 has an average full-year gain of 33.8%.
Although the Nasdaq doesn’t have as good a record, the index has increased 90% of the time when it is up by at least 20% at by the end of October. On Thursday it closed up 24.97%. The odds are in your favour! And data shows, this index usually has an average return of 7.48% for the remaining two months, making a full year or year-end gain of 42.81%.
So why are the indexes up?
- The October jobs report showed that the economy added more jobs than expected. More jobs = more people making money. Essentially, more people with jobs equates to higher economic output, retail sales, savings and corporate profits. This means that stocks generally rise or fall with good or bad employment reports, as investors digest the potential changes in these areas.
- The Federal Reserve cut interest rates for the third time this year. Lower interest rates = increased cashflow. Essentially, when interest rates are lower, debt expenses are less, this means company revenues are generally higher and can be re-invested into growth. Likewise, when debt expenses are less, consumers have more cash in their accounts to spend / save / invest.
- Economic growth may have slowed, it's still growing. The above two points affect GDP and GDP influences the stock market. Any significant change in GDP, up or down, usually has a significant effect on the direction of the stock market. For example, when an economy is healthy and growing, it is expected that businesses will report better earnings and growth.
Long story short, there could be a sack of cash from Santa this year 💰
Not so fast: You've probably heard before that past results are no indication of future returns, so while the past 70 years have shown a rise in returns on the indexes mentioned above, US stocks on Thursday fell amid concerns over if the US will be able to secure a genuine trade agreement with China soon (scroll down for more info on this).
Not helping the fall in US stocks on Thursday was an impeachment-inquiry vote over President Donald Trump that was passed in the House. Impeachment in the US is where a public officer, like the President, is charged for misconduct. The House vote on Thursday implemented a procedure likely to lead to impeachment against Trump which could see televised hearings starting in two weeks.
Ready the popcorn! 🍿