"There are no wrong turnings. Only paths we had not known we were meant to walk." – Guy Gavriel Kay

Good evening,

October began choppily, with the S&P 500 slipping 1.5% in the first three days of the month. Thus far in 2024, six out of 10 months have begun with declines, but eight out of the nine months have ended with stock-market gains. Thus, as Fundstrat Head of Research Tom Lee noted on Thursday evening, "the fact that we are down in the first three days is not entirely a signal for subsequent performance this year."

At our weekly research huddle, Head of Technical Strategy Mark Newton put it more bluntly: "The little bit of consolidation we saw at the beginning of the week was almost a non-event," in his view. "Look at the S&P 500," he said. "We're less than 1% from all-time highs. In my view, breadth has proven solid in recent weeks, and momentum and technical structure are in good shape," he said. 

Yet seasonality remains a concern. The Fundstrat Data Science team looked at previous instances in which stocks notched strong gains in the first three quarters of the year. This year's "first three quarters" performance of the S&P 500 was the ninth best since 1950. Looking at the other strong "first three quarters," in the top 10, the team discovered that stocks declined in October seven out of nine times. The median decline was around 2%. 

As Newton pointed out, election-year Octobers also present challenging seasonality: "A lot of people talk about September being difficult for stocks, but in election years, it's actually October that has a far worse median rate of return," he observed. 

Nevertheless, we saw positive developments for investors this week. Workers went on strike at U.S. East Coast and Gulf Coast ports at midnight on Tuesday, raising fears of supply chain disruptions and thus, potential upward pressure on inflation. Those fears evaporated Thursday night after a tentative agreement cleared the way to an immediate re-opening of the ports. 

Arguably, the week's most important macroeconomic data came from the September jobs report released on Friday morning. It came in well above consensus estimates – +254,000 versus +150,000 expectations. "This was a clean beat driven by restaurants [which added 69,000 jobs]," Lee noted. The positive surprise on the unemployment rate, which fell to 4.1%, "shows that the job market remains resilient," in Lee's view. 

Markets rose on Friday after the ports reopened and strong jobs numbers came in, but Lee remains unsure that this means a "broader greenlight for stocks." Spot VIX was trading around 19 on Friday afternoon, higher than the 17 level he would prefer. Furthermore, the VIX futures term structure remained inverted, "signaling that we are still in the midst of the 'iffy October' period," Lee explained. An "un-inverting" would signal a possible bottoming for the S&P 500. This is shown in our Chart of the Week:

Sector Allocation Strategy

These are the latest strategic sector ratings from Head of Research Tom Lee and Head of Technical Strategy Mark Newton – part of the October 2024 update to the FSI Sector Allocation Strategy. FS Insight Macro and Pro subscribers can click here for ETF recommendations, precise guidance on strategic and tactical weightings, detailed commentary, and methodology.

Elsewhere

The Food and Drug Administration (FDA) removed Eli Lilly's Wegovy and Mounjaro medications from the drug shortage list, thus reinstating the patent protections for the blockbuster diabetes and weight-loss treatments. This means that compounding pharmacies will no longer legally be able to sell copycat versions en masse. Novo Nordisk's competitor Ozempic and Wegovy treatments remain on the drug shortage list. 

Hurricane Helene has officially become the deadliest hurricane to hit the U.S. since Hurricane Katrina devastated New Orleans in 2005. Helene's death toll surpassed 200. In addition to the loss of life and destruction of homes and businesses, the storm is likely to cause serious problems for the semiconductor industry, as it devastated Spruce Pine, NC – the world's only source for high-purity quartz, an essential material used in chip manufacturing.

The United Kingdom shut down its last remaining coal power station on Monday, becoming the first major economy to give up entirely on coal power. The country's – and the world's – first coal power plant came online in 1882, built by Thomas Edison. Its last, located in Ratcliffe-on-Soar in the East Midlands, came online in 1967.

The European Union approved new tariffs of up to 45% on Chinese-made electric vehicles. In addition to the expected opposition from China, the move faced criticism from European carmakers including BMW and Volkswagen and officials from Germany and Spain. The European critics urged the EU and China to instead work toward a negotiated solution to the problems presented by Beijing's subsidizing of China's EV industry.

Saudi Arabia's oil minister, Prince Abdulaziz bin Salman, warned that oil prices could fall to under $50 a barrel because some other members of OPEC+ have allegedly been flouting agreed-upon production limits. Industry observers said bin Salman's statement could be interpreted as a subtle threat that his country could start a price war if compliance did not improve. 

Google announced a new effort to monetize its AI efforts, rolling out ads that will appear within and alongside AI-generated search summaries. The ads will be clearly labeled as such and only appear in summaries to queries with commercial relevance. 

OpenAI reportedly closed out its latest funding round, with Microsoft, Nvidia, Tiger Global, and SoftBank among the investors. The latest funding efforts are reported to have raised $6.6 billion, valuing OpenAI at $157 billion.

And finally: Pink Floyd agreed to sell rights to its music catalog to Sony Music for about $400 million. The deal includes not just the band's recorded music, but also the band's name and the likenesses of the individual musicians. It does not, however, include songwriting royalties.