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Market Recap
Happy November.
The fourth quarter is already one month in. The market ultimately couldn’t hold onto gains, dropping 1.9% on the last trading day of October, resulting in a 1.0% decline in the S&P 500 for the month. That said, this is still a fairly strong market as S&P 500 has risen in 8 out of the 10 months this year, with an increase of approximately 20%.
Regarding sector performance, most sectors fell along with the index. Financials was the strongest sector in October, up 2.6%, mainly benefiting from strong bank earnings. Communication Services ex-FANG+ was the second strongest sector, driven by strong performances from TMUS -0.04% and gaming stocks such as TTWO -1.36% and EA -0.33% . Energy rebounded after two months as the weakest-performing S&P 500 sector. Although ongoing retaliation between Israel and Iran didn’t significantly shock the market, oil prices halted a three-month decline, which helped stabilize the energy sector’s earlier downtrend.
Healthcare was the biggest laggard, with all healthcare subgroups trading lower—pharma and life sciences were down -4.6% and -11.1%, respectively, and healthcare providers declined by -7.3%.
Other sectors largely followed the broader market trend, pulling back from strong performances over the past three months. FANG+ was marginally higher, thanks primarily to good earnings from NVDA 1.98% , GOOGL -6.13% , and NFLX 1.54% . TSLA showed strong resilience – rebounding strongly after earnings, offsetting earlier losses from the robotaxi reveal – although it declined 4.5% in October overall.
3Q2024 earnings season is halfway through. Of the S&P 500, 339 companies (68%) have reported their 3Q earnings. 78% of these companies beat estimates, close to the levels seen in the past five (77%) and ten years (75%). The earnings surprise factor was 7.3%, slightly below the five-year average of 8.5%, but above the ten-year average of 6.8%.
Overall, earnings season has shown solid results, indicating that U.S. corporations (and the U.S. economy) remain in good shape. More importantly, more companies have reported strong margin performance, showing improved competency and efficiency.
Beyond the stock market, the fixed-income markets saw more action. Since the Fed began rate cuts in September, treasury yields have fully round-tripped back to 4.3%, the level seen in July. Other interest rate-related metrics, such as the 30-year mortgage rate, also returned back to 7 handle.
The rise in rates is partly due to hot macro data, like September’s NFP and CPI, reinforcing the “good news is bad news” macro backdrop. Additionally, Trump’s election campaign seems to be gaining an advantage in betting markets and polls over the past few weeks, and his policies—domestically cutting taxes and imposing tariffs internationally—have heightened concerns about future fiscal deficits and inflation. (However, we believe this election remains highly contested, and our survey shows investors believe this election could potentially require days or even weeks after voting day to determine the winner.)
The treasury borrowing announcement in the last week of October did not cause much market reaction. Although the treasury decided to borrow less in Q4 than previously estimated, the estimated borrowing for Q1 next year is at the high end of expectations.
This amount seems based on either a debt limit increase or suspension, with the congress election uncertainty posing further questions. Thus, the upcoming debt limit debate and Q1 treasury borrowing will worth watching.
Sector Rating
In the past month, macro conditions have not changed significantly, so our sector ratings remain the same as last month. As we approach year-end, with the election results expected to influence sector allocations, we will make more updates in the coming two months.
Currently, Tom and Mark agree on ratings for 7 of the 11 sectors.
The differences are as follows:
- Tom overweights Consumer Discretionary and Healthcare, while Mark rates them as neutral.
- Tom overweights Energy, while Mark underweights it.
- Tom underweights Utilities, while Mark rates them as neutral.
Tactical Rankings
Tactical Rankings saw little change from last month. The only change is that, due to poor October performance, Basic Materials has replaced Consumer Staples in the bottom three. As a result, last month’s tactical underweight of 2% in Consumer Staples will be added back, while 2% will be subtracted from Basic Materials.
The other two tactical underweights remain Healthcare and Energy.
- As noted above, Healthcare was the worst performer in October, but the sector does start to show some early sign of stabilization.
- While Energy has halted its recent decline, weak demand and both presidential candidates’ pledges to control oil prices mean that Energy still faces challenges.
The top three sectors remain broader Tech (Tech + Communication Services) and Financials. In fact, Mark recently noted that the “abnormal weakness” in Tech on October’s last trading day triggered a DeMark 13 countdown buy signal, which could help Tech climb higher. And despite recent price fluctuations, technology could outperform after the election.
Overall, compared to last month’s sector allocation, the main change is the reduction of materials weighting and the increase in consumer staples mentioned in the tactical rankings. Other changes are primarily based on each sector’s relative performance in October.
Compared to the overall index*, Technology, Financials, and Communication Services remain our three most overweighted sectors—with additional allocations of 2.9%, 2.6%, and 1.9%, respectively.
Other non-commodity cyclical sectors, such as Consumer Discretionary, Industrials, and Real Estate, were assigned an additional 0.2-0.5% each.
On the other hand, our largest underweights are primarily in defensive and commodity sectors.
- Regarding defensive sectors, we underweight Staples, Healthcare, and Utilities by 2.2%, 1.8%, and 0.8%, respectively.
- For Commodity sectors, we overweight Energy and Materials by 1.9% and 1.8%, respectively.
The above-mentioned weights are based on an 85% Sector ETF + 15% Tactical ETF allocation. For a 100% allocation to Sector ETFs, refer to slide 43 in the attached deck.
ETF Picks
In October, three of our five ETF picks outperformed the market, but due to the impact of the Home Construction ETF (ITB 0.82% ), overall performance trailed the market by 0.4%.
While we are in a historically strong season for home builders, recent earnings have shown that high mortgage rates still affect builder margins. With the Fed initiating the rate-cutting cycle, we believe this margin pressure will gradually ease. However, technically, we decided to remove ITB 0.82% from our individual recommendations.
USRT 0.10% faced a similar situation. Rising rates have negatively impacted REITs, from valuation and financing costs to dividend attractiveness. However, the recent increase in treasury rates hasn’t altered our overall optimism about real estate. Nevertheless, technically, we believe other ETFs may offer better opportunities.
In November, we are replacing ITB 0.82% , USRT 0.10% , and ARKQ 3.00% with BITB -3.85% , SKYY 1.56% , and ARKW 2.46% (technically stronger than ARKQ).
Our latest five ETFs are as follows:
- Global X FinTech ETF (FINX -1.03% )
- iShares Cybersecurity & Tech ETF (IHAK 1.53% )
- Bitwise Bitcoin ETF (BITB -3.85% )
- First Trust Cloud Computing ETF (SKYY 1.56% )
- ARK Next Generation Internet ETF (ARKW 2.46% )
