All three indices posted big monthly gains and the Dow Jones index was up over 14% in its best month since 1976. The S&P 500 index was up over 8% and the Nasdaq gained about 4% in October after some sell-off in September. The significant gains came in the last two weeks of October as the sentiment was fueled by reports suggesting that the Federal Reserve was likely to slow down its pace of rate hikes after the November policy meet.
The Federal Reserve, in its policy meet on November 2, imposed another super-charged interest rate, hiking rates by 0.75% once again. But the officials hinted at smaller increases in the next meetings. This week’s recent hike in interest rates moved the Fed’s Target funds rate to be between 3.75%-4.0%, the highest since 2008.
Exhibit 1: October 2022 U.S. Index performance
Source: S&P Dow Jones Indices, Oct 31, 2022
Energy sector remains the big winner for October and YTD 2022
All the 11 S&P 500 sectors ended in green in October except the Communication Services sector. Among the big gainers, Energy sector added about 25% of monthly gains as oil prices soared. Rate-sensitive sectors like Utilities, Real Estate and Consumer Discretionary gained the least during October.
Exhibit 2: Sectoral gains for October 2022
Source: S&P Dow Jones Indices, Oct 31, 2022
Third-quarter earnings season kicks off in October with mixed bag performance
Q3 earnings on Wall Street began with all the major banks reporting a boost in their net interest income as interest rates are on the rise. However, the banks’ profits from trading and mergers and acquisitions were relatively subdued due to lacklustre business on the deal-making side. Large-cap technology names, including the FAANG stocks, came out with mixed-bag performances. Stocks like Netflix (NFLX), Apple (AAPL) and Intel (INTC) rallied post their earnings as investors cheered their upbeat numbers. Whereas other tech giants like Alphabet (GOOGL), Amazon (AMZN), Meta Platforms (META) and Microsoft (MSFT) disappointed investors.
The energy sector remains the bright spot
Among the quarterly earnings so far, the top U.S. oil companies- Exxon Mobil (XOM) and Chevron (CVX) – reported bumper earnings. Exxon posted the highest profits in its history while Chevron announced its second-best quarterly results as demand and prices of natural gas soared. The combined net income for both these companies came in at a whopping $31 billion during the quarter.
Exhibit 3: Energy stocks earnings and sectoral gains 2022
Will stocks continue their rally to close out 2022?
A rebound in stocks seen in October gives investors hope that perhaps the worst is behind us. Some of the economic data released during the month indicated progress in the Fed’s effort to cool the economy. The GDP data suggested that the U.S. economy rebounded in Q3 after two consecutive quarters of negative growth, indicating a revival and recovery, thus helping to calm the recession jitters. Additionally, in its latest FOMC meet this week, the Fed has reiterated to investors that they are on the way to bringing down inflation, and perhaps this may mean reducing the pace of interest rate hikes in the next upcoming meetings which is positive for the equity markets.
