Stock market rises amid negative atmosphere

William Rutherford, BridgeTower Media Newswires

The S&P 500 last month rose 6.9 percent – its best October performance in six years – in spite of negative news. Disappointing earnings from the likes of Amazon and Apple could not overshadow the strength of the overall market, with more than 80 percent of stocks meeting or exceeding earnings forecasts. Supply chain interruptions are the cause of revenue misses at both Amazon and Apple, costing the latter one $6 billion in sales in the quarter.
Interest rates ticked up, but the yield curve did not invert (when short-term rates become higher than long-term rates), which is usually a sign of a recession. No such sign is apparent.

In short, there are many reasons to sell stocks, but one good reason to buy: stocks are going up. After exhibiting strength in October, the market is now entering the historically best three months of the year for stocks.

Even the pandemic seems to be winding down. Nationally, new cases dropped below 75,000, less than half the amount in August. While no cymbals are crashing, the virus appears to be subsiding. Will it experience an uptick during the northern hemisphere’s traditional cold and flu season? Is the virus becoming endemic and we’re learning to co-exist? Time will tell.

President Biden’s economic package has yet to affect the economy, but if the stimulus comes, it should have a positive effect – in spite of the massive tax offsets. Employment numbers in October exceeded expectations, with many workers trading up to higher-paying jobs, thereby increasing their purchasing power. Increased purchasing of things as opposed to services has resulted in supply chain disruptions and higher prices for things, reversing a 25-year trend.

In short, the market appears to want to go up despite the many threats.

The Federal Reserve has been holding interest rates at historically low levels for an extended time. That policy appears to be ending, and the Fed has begun tapering bond purchases, which had the effect of keeping rates low. The bond futures market raised forecasts of interest rate increases to mid-2022.

Rising interest rates are usually a signal that the Fed believes the economy is strong or that inflation is a threat. In its Nov. 3 announcement, the Fed indicated that inflation may be increasing beyond temporary supply chain price impacts – i.e., to a level of more than 2 percent – and therefore it would target the higher number in its policy making.

Higher interest rates would reflect a stronger economy. Higher rates could also result in a stronger dollar, which would affect U.S. trade with foreign buyers. Raising rates could slow the robust economy, but the Fed is still likely to favor easy money policies and lean toward low interest rates. The Fed historically favors policies that support strong employment as well as economic growth.

Markets were unaffected by the talk of rate rises, as equity markets climbed to new highs and bond market interest rates remained low. The 10-year yield remained just below 1.6 percent.

A new chapter has begun in the COVID era. For now the U.S. economy appears strong and remains a good place to invest.

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William Rutherford is the founder and portfolio manager of Portland-based Rutherford Investment Management. Contact him at 888-755-6546 or wrutherford@rutherfordinvestment.com. Information herein is from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. Investment involves risk and may result in losses.