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  • Stocks are having a stellar October. Why the bear-market rally may have more room to run.

    Stocks are having a stellar October. Why the bear-market rally may have more room to run.

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    An earlier version of this story misstated the date of the U.S. midterm elections. They will be held Nov. 8, not Nov. 9.

    Despite a raft of risky events that investors must face down over the coming weeks, some on Wall Street believe that the latest bear-market rally in stocks has more room to run.

    Although the S&P 500
    SPX,
    +1.50%    ,
    Dow Jones Industrial Average
    DJIA,
    +0.97%
    and Nasdaq Composite
    COMP,
    +16.23%
    remain mired in bear markets, stocks have been bouncing back from the “oversold” levels when the major indexes fell to their lowest levels in two years. Bear markets are known for sharp bounces, such as the rebound that took the S&P 500 up more than 17% from its mid-June low before sliding back down to set a new 2022 low on Oct. 12.

    With that said, here are a few things for investors to keep in mind.

    There’s plenty of event risk facing markets

    On top of a deluge of corporate earnings this week, including some of the biggest megacap tech stocks like Microsoft Corp.
    MSFT,
    +1.07%
    and Amazom.com Inc.
    AMZN,
    +0.64%    ,
    investors will also receive some key economic data reports over the next couple of weeks — including a reading from the Fed’s preferred inflation gauge on Friday, and the October jobs numbers, set to be released on Nov. 4.

    Beyond that, there’s also the Fed’s next policy meeting that concludes on Nov. 2. The Fed is widely expected to hike interest rates by another 75 basis points, the fourth “jumbo” hike this year.

    Midterm U.S. elections, which will determine which party controls the House and Senate in the U.S. are slated to take place Nov. 8.

    Investors are still trying to parse the Fed’s latest messaging shift

    Investors cheered what some market watchers described as a coordinated shift in messaging from the Fed last week, conveyed via an Oct. 21 report from The Wall Street Journal that indicated the size of a December Fed rate increase would be up for debate, along with comments from San Francisco Fed President Mary Daly.

    Still, the Fed isn’t expected to materially pivot any time soon.

    Because the fact remains: there’s plenty of froth that needs to be squeezed out of markets after nearly two years of extraordinary monetary and fiscal stimulus unleashed in the wake of the COVID-19 pandemic, according to Steve Sosnick, chief strategist at Interactive Brokers.

    “It’s easier to inflate a bubble than to pop it, and I’m not using the term ‘bubble’ facetiously,” he said during a phone interview with MarketWatch.

    Richard Farr, chief market strategist at Merion Capital Group, played down the impact of the Fed’s latest “coordinated” shift in guidance during an interview with MarketWatch, saying the impact on the terminal fed-funds rate is relatively immaterial.

    Fed-funds futures traders anticipate the upper end of the central bank’s key target rate will rise to 5% before the end of the first quarter of next year, and remain there potentially into the fourth quarter, although an earlier cut wouldn’t be a complete surprise, according to the CME’s FedWatch tool.

    Market technicians believe stocks might move a little higher

    So far, October isn’t shaping up to be anything like September, when stocks fell 9.3% to polish off the worst first nine months of a calendar year in two decades.

    Instead, the S&P 500 has already risen more than 5.5% since the start of October despite briefly crashing to its lowest intraday level in more than two years following the release of the September consumer-price index report earlier this month.

    Read: ‘Bear killers’ and crashes: What investors need to know about October’s complicated stock-market history

    Technical indicators suggest the S&P 500 can continue to build on last week’s gain, said Katie Stockton, a market strategist at Fairlead Strategies, in a note she shared with clients and MarketWatch.

    According to her, the next key level to watch out for on the S&P 500 is north of 3,900, more than 100 points above where the index closed on Monday.

    “Short-term momentum remains to the upside within the context of the year-to-date downtrend. Support near 3,505 was a natural staging ground for a relief rally, and initial resistance is near 3,914,” she said.

    A key bear sees a tradeable opportunity

    Mike Wilson, Morgan Stanley’s chief U.S. equity strategist and chief investment officer, has been one of Wall Street’s most outspoken bears for more than a year now.

    But in a note to clients early this week, he reiterated that stocks were looking ripe for a bounce.

    “Last week’s tactical bullish call was met with doubt from clients, which means there is still upside as we transition from Fire to Ice — falling inflation expectations can lead to lower rates and higher stock prices in the absence of capitulation from companies on 2023 EPS guidance,” Wilson said.

    This earnings season is off to an good start

    At this point, it’s safe to say that the third-quarter earnings season has vanquished fears that the Fed’s interest-rate hikes and gnawing inflation had already dramatically eroded profit margins, market strategists said.

    The quality of earnings reported already has surpassed some of the early “whisper numbers” bandied about by traders and strategists, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

    In aggregate, companies are reporting earnings 5.4% above expectations, according to data from Refinitiv shared with the media on Monday. This compares to a long-term average — since 1994 — of 4.1%.

    However, when the energy sector is removed from the equation, expectations seem much more grim. The blended year-to-year earnings estimate for the third quarter is -3.6%, according to the Refinitiv data.

    While investors are still waiting on earnings from roughly three-quarters of S&P 500 firms, according to FactSet data, some — like Morgan Stanley’s Wilson — are already looking toward next year as they expect the outlook for profits will darken substantially, possibly leading to an earnings recession — when corporate earnings shrink for two quarters in a row.

    The outlook for the global economy remains dim

    Speaking of energy, crude oil prices are flashing an ominous warning about expectations for the global economy.

    “A lot of the weak oil reflects expectations that the global economy will be in recession and near recession,” said Steve Englander, global head of G-10 currency strategy at Standard Chartered.

    West Texas Intermediate crude-oil futures
    CLZ22,
    +0.48%
     settled lower on Monday, as lackluster import data from China and the end of the Communist Party’s leadership conference hinted at softening demand in the world’s second-largest oil consumer. Prices continued to decline early Tuesday.

    Be wary of ‘fighting the Fed’

    Investors remain worried that “something else might break” in markets, as MarketWatch reported over the weekend.

    It’s possible that such fears inspired the Fed’s apparent guidance shift, Sosnick said. But the fact remains: anybody buying stocks while the Fed is aggressively tightening monetary policy should be prepared to tolerate losses, at least in the near term, he said.

    “Simplest thing of all is: ‘don’t fight the Fed.’ If you’re trying to buy stocks now, what are you doing? It doesn’t mean you can’t buy stocks overall. But it means you’re fighting an uphill battle,” he said.

    The VIX is signaling that investors expect a wild ride

    Even as stocks extended their October rebound for another session on Monday, the Cboe Volatility Index
    VIX,
    -4.49%
    remained conspicuously elevated, reflecting the notion that investors don’t anticipate the market’s wild ride will end any time soon.

    The Wall Street “fear gauge” finished Monday’s session up 0.5% at 29.85 and it was trading just shy of the 30 level early Tuesday.

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  • Dow rises more than 400 points as stocks extend rally after best week since June

    Dow rises more than 400 points as stocks extend rally after best week since June

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    U.S. stocks advanced on Monday, adding to their gains after the best week for at least two of the three major indexes — the S&P 500 and the Dow — since June. The S&P 500
    SPX,
    +1.19%
    finished 44.59 points, or 1.2%, higher at 3,797.34. The Dow Jones Industrial Average
    DJIA,
    +0.54%
    rose 417.06 points, or 1.3%, to climb to 31,499.62. The Nasdaq Composite
    COMP,
    +0.86%
    advanced 92.90 points, or 0.9%, to close at 10,952.61. The rally comes as investors cling to hopes that the Federal Reserve will slow the pace of its interest rate hikes after November, market strategists said.

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  • Stock market bulls have a new story to sell you. Don’t believe them — they’re just in the ‘bargaining’ stage of grief

    Stock market bulls have a new story to sell you. Don’t believe them — they’re just in the ‘bargaining’ stage of grief

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    Might the bear market’s losses at its recent low have gotten so bad that it was actually good news?

    Some eager stock bulls I monitor are advancing this convoluted rationale. The outline of their argument is that when things get bad enough, good times must be just around the corner.

    But their argument tells us more about market sentiment than its prospects.

    At the market’s recent closing low, the S&P 500
    SPX,
    +1.19%
    had dropped to 25% below its early-January high. According to one version of this “so-bad-it’s-good” argument, the stock market in the past was a good buy whenever bear markets fell to that threshold. Following those prior occasions, they contend, the market was almost always higher in a year’s time.

    This is not an argument you’d normally expect to see if the recent low represented the final low of the bear market. On the contrary, it fits squarely within the third of the five-stage progression of bear market grief, about which I have written before: denial, anger, bargaining, depression and acceptance.

    With their argument, the bulls are trying to convince themselves that they can survive the bear market, rationalizing that the market will be higher in a year’s time. As Swiss-American psychiatrist Elisabeth Kübler-Ross put it when creating this five-stage scheme, the key feature of the bargaining stage is that it is a defense against feeling pain. It is far different than the depression and eventual acceptance that typically come later in a bear market.

    Though not all bear markets progress through these five stages, most do, as I’ve written before. Odds are that we have two more stages to go through. That suggests that the market’s rally over the past couple of weeks does not represent the beginning of a major new bull market.

    Numbers don’t add up

    Further support for this bearish assessment comes from the discovery that the bulls’ argument is not supported historically. Only in relatively recent decades was the market reliably higher in a year’s time following occasions in which a bear market had reached the 25% pain threshold. It’s not a good sign that the bulls are basing their optimism on such a flimsy foundation.

    Consider what I found upon analyzing the 21 bear markets since 1900 in the Ned Davis Research calendar in which the Dow Jones Industrial Average
    DJIA,
    +1.34%
    fell at least 25%. I measured the market’s one-year return subsequent to the day on which each of these 21 bear markets first fell to that loss threshold. In seven of the 21 cases, or 33%, the market was lower in a year’s time.

    That’s the identical percentage that applies to all days in the stock market over the past century, regardless of whether those days came during bull or bear markets. So, based on the magnitude of the bear market’s losses to date, there’s no reason to believe that the market’s odds of rising are any higher now than at any other time.

    This doesn’t mean that there aren’t good arguments for why the market might rise. But the 25%-loss concept isn’t one of them.

    Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

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  • S&P 500, Dow open higher, adding to gains after best week since June; Nasdaq declines

    S&P 500, Dow open higher, adding to gains after best week since June; Nasdaq declines

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    U.S. stocks opened higher on Monday after a volatile night of trading for futures as investors continued to react to shifting expectations about the future pace of Federal Reserve rate hikes. The S&P 500
    SPX,
    +1.19%
    rose 12 points, or 0.3%, to 3,763. The Dow Jones Industrial Average
    DJIA,
    +1.34%
    gained 184 points, or 0.6%, to 31,277. The Nasdaq Composite
    COMP,
    +0.86%
    fell 44 points, or 0.4%, to 10,812.

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  • Hong Kong stocks suffer worst single-day rout since 2008 as Xi consolidates power

    Hong Kong stocks suffer worst single-day rout since 2008 as Xi consolidates power

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    Hong Kong stocks suffered their worst single session since the 2008 financial crisis after Chinese leader Xi Jinping tightened his grip on power.

    The Hang Seng
    HSI,
    -6.36%
    ended more than 6% lower to a new 13-year low, with tech giants including JD.com
    9618,
    -13.17%

    JD,
    -0.02%    ,
    Baidu
    9888,
    -12.20%

    BIDU,
    -2.29%    ,
    Tencent
    700,
    -11.43%
    and Alibaba
    9988,
    -11.42%

    BABA,
    +0.22%
    dropping between 11% and 13% each.

    The local Shanghai Composite
    SHCOMP,
    -2.02%
    index fell a less dramatic 2%.

    Over the weekend, the 69-year-old Xi secured his third term as general secretary of the Chinese Communist Party. Reporters captured video of former Chinese President Hu Jintao getting escorted out of the closing ceremony. Four of the seven standing committee members were replaced, all of whom are at least 60 years old.

    Analysts at Goldman Sachs say most of the new appointees worked with Xi at earlier stages of their careers. “We note that incoming leaders could arguably be more focused on ideological and political subjects while the retiring policymakers appear more economy/market-oriented,” they said.

    They added that for valuations to improve, more clarity on the zero COVID policy, stabilization of the property markets, and de-escalation of both cross-straits and U.S.-China tensions would be needed.

    China also reported delayed data, saying its economy grew at a 3.9% year-over-year rate in the third quarter, up from 0.4% in the second quarter.

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  • U.S. stock futures give up early gains after Wall Street’s best week since June

    U.S. stock futures give up early gains after Wall Street’s best week since June

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    U.S. stock futures gave up strong early-session gains overnight after Wall Street notched its best week since June.

    After initially surging about 300 points, or 1% on Sunday evening, Dow Jones Industrial Average futures
    YM00,
    -0.02%
    were last about flat at midnight Eastern, while S&P 500 futures
    ES00,
    +0.05%
    and Nasdaq-100 futures
    NQ00,
    +0.16%
    similarly gave up sharp early gains.

    The U.S. Dollar Index
    DXY,
    +0.19%
    nudged higher, while the British pound
    GBPUSD,
    +0.12%
    surrendered much of an afternoon rally fueled by the possibility that Rishi Sunak will be Britain’s next prime minister, after Boris Johnson bowed out of the running. Crude prices
    CL.1,
    -0.55%
    ticked slightly higher Sunday.

    On Friday, the Dow Jones Industrial Average
    DJIA,
    +2.47%
     gained 748.97 points, or 2.5%, to close at 31,082.56. The S&P 500
    SPX,
    +2.37%
     climbed 86.97 points, or 2.4%, to finish at 3,752.75, and the Nasdaq Composite
    COMP,
    -0.81%
     rose 244.87 points, or 2.3%, to end at 10,859.72.

    The three major indexes scored their biggest weekly percentage gains since June last week. For the week, the Dow rose 4.9%, the S&P 500 gained 4.7% and the Nasdaq advanced 5.2%.  Yields on 10-year Treasury notes
    TMUBMUSD10Y,
    4.156%
    ended Friday at 4.228%.

    Investors were heartened by reports that the Fed may back off slightly from its aggressive rate-hiking policy later this year.

    The upcoming week is the busiest of the third-quarter earnings season, with 165 S&P 500 companies, including 12 Dow components reporting. That includes earnings from Big Tech companies Alphabet
    GOOGL,
    +1.16%    ,
    Amazon
    AMZN,
    +3.53%    ,
    Apple
    AAPL,
    +2.71%    ,
    Meta
    META,
    -1.16%
    and Microsoft
    MSFT,
    +2.53%    .

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  • Why stock-market investors fear ‘something else will break’ as Fed attacks inflation

    Why stock-market investors fear ‘something else will break’ as Fed attacks inflation

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    Some investors are on edge that the Federal Reserve may be overtightening monetary policy in its bid to tame hot inflation, as markets look ahead to a reading this coming week from the Fed’s preferred gauge of the cost of living in the U.S.  

    “Fed officials have been scrambling to scare investors almost every day recently in speeches declaring that they will continue to raise the federal funds rate,” the central bank’s benchmark interest rate, “until inflation breaks,” said Yardeni Research in a note Friday. The note suggests they went “trick-or-treating” before Halloween as they’ve now entered their “blackout period” ending the day after the conclusion of their November 1-2 policy meeting.

    “The mounting fear is that something else will break along the way, like the entire U.S. Treasury bond market,” Yardeni said.

    Treasury yields have recently soared as the Fed lifts its benchmark interest rate, pressuring the stock market. On Friday, their rapid ascent paused, as investors digested reports suggesting the Fed may debate slightly slowing aggressive rate hikes late this year.

    Stocks jumped sharply Friday while the market weighed what was seen as a potential start of a shift in Fed policy, even as the central bank appeared set to continue a path of large rate increases this year to curb soaring inflation. 

    The stock market’s reaction to The Wall Street Journal’s report that the central bank appears set to raise the fed funds rate by three-quarters of a percentage point next month – and that Fed officials may debate whether to hike by a half percentage point  in December — seemed overly enthusiastic to Anthony Saglimbene, chief market strategist at Ameriprise Financial. 

    “It’s wishful thinking” that the Fed is heading toward a pause in rate hikes, as they’ll probably leave future rate hikes “on the table,” he said in a phone interview. 

    “I think they painted themselves into a corner when they left interest rates at zero all last year” while buying bonds under so-called quantitative easing, said Saglimbene. As long as high inflation remains sticky, the Fed will probably keep raising rates while recognizing those hikes operate with a lag — and could do “more damage than they want to” in trying to cool the economy.

    “Something in the economy may break in the process,” he said. “That’s the risk that we find ourselves in.”

    ‘Debacle’

    Higher interest rates mean it costs more for companies and consumers to borrow, slowing economic growth amid heightened fears the U.S. faces a potential recession next year, according to Saglimbene. Unemployment may rise as a result of the Fed’s aggressive rate hikes, he said, while “dislocations in currency and bond markets” could emerge.

    U.S. investors have seen such financial-market cracks abroad.

    The Bank of England recently made a surprise intervention in the U.K. bond market after yields on its government debt spiked and the British pound sank amid concerns over a tax cut plan that surfaced as Britain’s central bank was tightening monetary policy to curb high inflation. Prime minister Liz Truss stepped down in the wake of the chaos, just weeks after taking the top job, saying she would leave as soon as the Conservative party holds a contest to replace her. 

    “The experiment’s over, if you will,” said JJ Kinahan, chief executive officer of IG Group North America, the parent of online brokerage tastyworks, in a phone interview. “So now we’re going to get a different leader,” he said. “Normally, you wouldn’t be happy about that, but since the day she came, her policies have been pretty poorly received.”

    Meanwhile, the U.S. Treasury market is “fragile” and “vulnerable to shock,” strategists at Bank of America warned in a BofA Global Research report dated Oct. 20. They expressed concern that the Treasury market “may be one shock away from market functioning challenges,” pointing to deteriorated liquidity amid weak demand and “elevated investor risk aversion.” 

    Read: ‘Fragile’ Treasury market is at risk of ‘large scale forced selling’ or surprise that leads to breakdown, BofA says

    “The fear is that a debacle like the recent one in the U.K. bond market could happen in the U.S.,” Yardeni said, in its note Friday. 

    “While anything seems possible these days, especially scary scenarios, we would like to point out that even as the Fed is withdrawing liquidity” by raising the fed funds rate and continuing quantitative tightening, the U.S. is a safe haven amid challenging times globally, the firm said.  In other words, the notion that “there is no alternative country” in which to invest other than the U.S., may provide liquidity to the domestic bond market, according to its note.


    YARDENI RESEARCH NOTE DATED OCT. 21, 2022

    “I just don’t think this economy works” if the yield on the 10-year Treasury
    TMUBMUSD10Y,
    4.228%
    note starts to approach anywhere close to 5%, said Rhys Williams, chief strategist at Spouting Rock Asset Management, by phone.

    Ten-year Treasury yields dipped slightly more than one basis point to 4.212% on Friday, after climbing Thursday to their highest rate since June 17, 2008 based on 3 p.m. Eastern time levels, according to Dow Jones Market Data.

    Williams said he worries that rising financing rates in the housing and auto markets will pinch consumers, leading to slower sales in those markets.

    Read: Why the housing market should brace for double-digit mortgage rates in 2023

    “The market has more or less priced in a mild recession,” said Williams. If the Fed were to keep tightening, “without paying any attention to what’s going on in the real world” while being “maniacally focused on unemployment rates,” there’d be “a very big recession,” he said.

    Investors are anticipating that the Fed’s path of unusually large rate hikes this year will eventually lead to a softer labor market, dampening demand in the economy under its effort to curb soaring inflation. But the labor market has so far remained strong, with an historically low unemployment rate of 3.5%.

    George Catrambone, head of Americas trading at DWS Group, said in a phone interview that he’s “fairly worried” about the Fed potentially overtightening monetary policy, or raising rates too much too fast.

    The central bank “has told us that they are data dependent,” he said, but expressed concerns it’s relying on data that’s “backward-looking by at least a month,” he said.

    The unemployment rate, for example, is a lagging economic indicator. The shelter component of the consumer-price index, a measure of U.S. inflation, is “sticky, but also particularly lagging,” said Catrambone.

    At the end of this upcoming week, investors will get a reading from the  personal-consumption-expenditures-price index, the Fed’s preferred inflation gauge, for September. The so-called PCE data will be released before the U.S. stock market opens on Oct. 28.

    Meanwhile, corporate earnings results, which have started being reported for the third quarter, are also “backward-looking,” said Catrambone. And the U.S. dollar, which has soared as the Fed raises rates, is creating “headwinds” for U.S. companies with multinational businesses.

    Read: Stock-market investors brace for busiest week of earnings season. Here’s how it stacks up so far.

    “Because of the lag that the Fed is operating under, you’re not going to know until it’s too late that you’ve gone too far,” said Catrambone. “This is what happens when you’re moving with such speed but also such size,  he said, referencing the central bank’s string of large rate hikes in 2022.

    “It’s a lot easier to tiptoe around when you’re raising rates at 25 basis points at a time,” said Catrambone.

    ‘Tightrope’

    In the U.S., the Fed is on a “tightrope” as it risks over tightening monetary policy, according to IG’s Kinahan. “We haven’t seen the full effect of what the Fed has done,” he said.

    While the labor market appears strong for now, the Fed is tightening into a slowing economy. For example, existing home sales have fallen as mortgage rates climb, while the Institute for Supply Management’s manufacturing survey, a barometer of American factories, fell to a 28-month low of 50.9% in September.

    Also, trouble in financial markets may show up unexpectedly as a ripple effect of the Fed’s monetary tightening, warned Spouting Rock’s Williams. “Anytime the Fed raises rates this quickly, that’s when the water goes out and you find out who’s got the bathing suit” — or not, he said.

    “You just don’t know who is overlevered,” he said, raising concern over the potential for illiquidity blowups. “You only know that when you get that margin call.” 

    U.S. stocks ended sharply higher Friday, with the S&P 500
    SPX,
    +2.37%    ,
    Dow Jones Industrial Average
    DJIA,
    +2.47%
    and Nasdaq Composite each scoring their biggest weekly percentage gains since June, according to Dow Jones Market Data. 

    Still, U.S. equities are in a bear market. 

    “We’ve been advising our advisors and clients to remain cautious through the rest of this year,” leaning on quality assets while staying focused on the U.S. and considering defensive areas such as healthcare that can help mitigate risk, said Ameriprise’s Saglimbene. “I think volatility is going to be high.”

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  • U.S. stocks finish lower as Treasury yields climb to highest level in more than 14 years.

    U.S. stocks finish lower as Treasury yields climb to highest level in more than 14 years.

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    U.S. stocks finished lower on Thursday for the second day in a row as yields on the 10-year and 2-year Treasury notes advanced to their highest levels in more than 14 years, causing early earnings-inspired gains in equities to evaporate. The S&P 500
    SPX,
    -0.80%
    finished off 29.38 points, or 0.8%, at 3,665.78. The Dow Jones Industrial Average
    DJIA,
    -0.30%
    dropped 90.22 points, or 0.3%, to close at 30,333.59. The Nasdaq Composite
    COMP,
    -0.61%
    shed 65.66 points, or 0.6%, to close at 10,614.84. The yield on the 2-year Treasury note rose to 4.608%, its highest level since Aug. 8, 2007, based on 3 p.m. figures from Dow Jones Market Data. The yield on the 10-year Treasury advanced 9.8 basis points to 4.225%, the highest since June 17, 2008.

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  • U.S. stocks finish lower for first time in three sessions as dollar, bond yields rise

    U.S. stocks finish lower for first time in three sessions as dollar, bond yields rise

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    U.S. stocks finished lower on Wednesday, with the major indexes logging their first loss in three days, as Treasury yields and the dollar continued to climb, outweighing more strong earnings reports from American firms. The S&P 500
    SPX,
    -0.67%
    finished down 24.82 points, or 0.7%, at 3,695.16. The Dow Jones Industrial Average
    DJIA,
    -0.33%
    closed off 99.99 points, or 0.3%, at 30,423.81. The Nasdaq Composite
    COMP,
    -0.85%
    shed 91.89 points, or 0.9%, at 10,680.51. The ICE U.S. Dollar Index, a gauge of the dollar’s strength against a basket of rivals, was up 0.7% at 112.96. Treasury yields continued to advance past 4% across the curve.

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  • These 27 stocks can give you a more diversified portfolio than the S&P 500 — and that’s a key advantage right now

    These 27 stocks can give you a more diversified portfolio than the S&P 500 — and that’s a key advantage right now

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    You probably already know that because of market-capitalization weighting, a broad index such as the S&P 500
    SPX,
    -0.67%
    can be concentrated in a handful of stocks. Index funds are popular for good reasons — they tend to have low expenses and it is difficult for active managers to outperform them over the long term.

    For example, look at the SPDR S&P 500 ETF Trust
    SPY,
    -0.71%    ,
    which tracks the S&P 500 by holding all of its stocks by the same weighting as the index. Five stocks — Apple Inc.
    AAPL,
    +0.08%    ,
    Microsoft Corp.
    MSFT,
    -0.85%    ,
    Amazon.com Inc.
    AMZN,
    -1.11%    ,
    Alphabet Inc.
    GOOG,
    -1.08%

    GOOGL,
    -1.13%
    and Tesla Inc.
    TSLA,
    +0.84%    ,
    make up 21.5% of the portfolio.

    But there are other considerations when it comes to diversification — namely, factors. During an interview, Scott Weber of Vaughan Nelson Investment Management in Houston explained how groups of stock and commodities can move together, adding to a lack of diversification in a typical portfolio or index fund.

    Weber co-manages the $293 million Natixis Vaughan Nelson Select Fund
    VNSAX,
    -0.96%    ,
    which carries a five-star rating (the highest) from investment-researcher Morningstar, and has outperformed its benchmark, the S&P 500.

    Vaughan Nelson is a Houston-based affiliate of Natixis Investment Managers, with about $13 billion in assets under management, including $5 billion managed under the same strategy as the fund, including the Natixis Vaughan Nelson Select ETF
    VNSE,
    -0.87%    .
    The ETF was established in Sept, 2020, so does not yet have a Morningstar rating.

    Factoring-in the factors

    Weber explained how he and colleagues incorporate 35 factors into their portfolio selection process. For example, a fund might hold shares of real-estate investment trusts (REITs), financial companies and energy producers. These companies are in different sectors, as defined by Standard & Poor’s. Yet their performance may be correlated.

    Weber pointed out that REITs, for example, were broken out of the financial sector to become their own sector in 2016. “Did that make REIT’s more sensitive to interest rates? The answer is no,” he said. “The S&P sector buckets are somewhat  better than arbitrary, but they are not perfect.”

    Of course 2022 is something of an exception, with so many assets dropping in price at the same time. But over the long term, factor analysis can identify correlations and lead money managers to limit their investments in companies, sectors or industries whose prices tend to move together. This style has helped the Natixis Vaughan Nelson Select Fund outperform against its benchmark, Weber said.

    Getting back to the five largest components of the S&P 500, they are all tech-oriented, even though only two, Apple and Microsoft, are in the information technology sector, while Alphabet is in the communications sector and Tesla is in the consumer discretionary sector. “Regardless of the sectors,” they tend to move together, Weber said.

    Exposure to commodity prices, timing of revenue streams through economic cycles (which also incorporates currency exposure), inflation and many other items are additional factors that Weber and his colleagues incorporate into their broad allocation strategy and individual stock selections.

    For example, you might ordinarily expect inflation, real estate and gold to move together, Weber said. But as we are seeing this year, with high inflation and rising interest rates, there is downward pressure on real-estate prices, while gold prices
    GC00,
    -0.01%
    have declined 10% this year.

    Digging further, the factors also encompass sensitivity of investments to U.S. and other countries’ government bonds of various maturities, credit spreads between corporate and government bonds in developed countries, exchange rates, and measures of liquidity, price volatility and momentum.

    Stock selection

    The largest holding of the Select fund is NextEra Energy Inc.
    NEE,
    -1.89%    ,
    which owns FPL, Florida’s largest electric utility. FPL is phasing-out coal plants and replacing power-generating capacity with natural gas as well as wind and solar facilities.

    Weber said: “There’s not a company on the planet that is better at getting alternate (meaning solar and wind) generation deployed. But because they own FPL, some of my investors say it is one of the largest carbon emitters on the planet.”

    He added that “as a consequence of their skill in operating, they re generating amazing returns for investors.” NextEra’s share shave returned 446% over the past 10 years. One practice that has helped to elevate the company’s return on equity, and presumably its stock price, has been “dropping assets down” into NextEra Energy Partners LP
    NEP,
    -2.61%    ,
    which NEE manages, Weber said. He added that the assets put into the partnership tend to be “great at cash-flow generation, but not on achieving growth.”

    When asked for more examples of stocks in the fund that may provide excellent long-term returns, Weber mentioned Monolithic Power Systems Inc.
    MPWR,
    -0.24%    ,
    as a way to take advantage of the broad decline in semiconductor stocks this year. (The iShares Semiconductor ETF
    SOXX,
    +0.64%
    has declined 21% this year, while industry stalwarts Nvidia Corp.
    NVDA,
    +0.70%
    and Advanced Micro Devices Inc.
    AMD,
    -1.19%
    are down 59% and 60%, respectively.)

    He said Monolithic Power has been consistently making investments that improve its return on invested capital (ROIC). A company’s ROIC is its profit divided by the sum of the carrying value of stock it has issued over the years and its current debt. It doesn’t reflect the stock price and is considered a good measure of a management team’s success at making investment decisions and managing projects. Monolithic Power’s ROICC for 2021 was 21.8%, according to FactSet, rising from 13.2% five years earlier.

    “We want to see a business generating a return on capital in excess of its cost of capital. In addition, they need to invest their capital at incrementally improving returns,” Weber said.

    Another example Weber gave of a stock held by the fund is Dollar General Corp.
    DG,
    +0.33%    ,
    which he called a much better operator than rival Dollar Tree Inc.
    DLTR,
    +0.14%    ,
    which owns Family Dollar. He cited DG’s roll-out of frozen-food and fresh food offerings, as well as its growth runway: “They still have 8,000 or 9,000 stores to build-out” in the U.S., he said.

    Fund holdings

    In order to provide a full current list of stocks held under Weber’s strategy, here are the 27 stocks held by the the Natixis Vaughan Select ETF as of Sept. 30. The largest 10 positions made up 49% of the portfolio:

    Company

    		 Ticker

    		 % of portfolio
    NextEra Energy Inc.

    		 NEE,
    -1.89%         		5.74%
    Dollar General Corp.

    		 DG,
    +0.33%         		5.51%
    Danaher Corp.

    		 DHR,
    -2.89%         		4.93%
    Microsoft Corp.

    		 MSFT,
    -0.85%         		4.91%
    Amazon.com Inc.

    		 AMZN,
    -1.11%         		4.90%
    Sherwin-Williams Co.

    		 SHW,
    -2.53%         		4.80%
    Wheaton Precious Metals Corp.

    		 WPM,
    -2.28%         		4.76%
    Intercontinental Exchange Inc.

    		 ICE,
    -1.16%         		4.52%
    McCormick & Co.

    		 MKC,
    +0.11%         		4.48%
    Clorox Co.

    		 CLX,
    +1.27%         		4.39%
    Aon PLC Class A

    		 AON,
    +0.21%         		4.33%
    Jack Henry & Associates Inc.

    		 JKHY,
    -0.97%         		4.08%
    Motorola Solutions Inc.

    		 MSI,
    -0.64%         		4.08%
    Vertex Pharmaceuticals Inc.

    		 VRTX,
    -2.72%         		4.01%
    Union Pacific Corp.

    		 UNP,
    -0.78%         		3.99%
    Alphabet Inc. Class A

    		 GOOGL,
    -1.13%         		3.03%
    Johnson & Johnson

    		 JNJ,
    -0.80%         		2.98%
    Nvidia Corp.

    		 NVDA,
    +0.70%         		2.92%
    Cogent Communications Holdings Inc.

    		 CCOI,
    -2.10%         		2.81%
    Kosmos Energy Ltd.

    		 KOS,
    +5.62%         		2.68%
    VeriSign Inc.

    		 VRSN,
    -0.43%         		2.15%
    Chemed Corp.

    		 CHE,
    -0.73%         		2.06%
    Berkshire Hathaway Inc. Class B

    		 BRK.B,
    -1.18%         		2.00%
    Saia Inc.

    		 SAIA,
    -4.36%         		1.97%
    Monolithic Power Systems Inc.

    		 MPWR,
    -0.24%         		1.96%
    Entegris Inc.

    		 ENTG,
    -0.17%         		1.93%
    Luminar Technologies Inc. Class A

    		 LAZR,
    -6.90%         		0.96%
    Source: Natixis Funds

    You can click on the tickers for more about each company. Click here for a detailed guide to the wealth of information available free on the MarketWatch.com quote page.

    Fund performance

    The Natixis Vaughan Select Fund was established on June 29, 2012. Here’s a 10-year chart showing the total return of the fund’s Class A shares against that of the S&P 500, with dividends reinvested. Sales charges are excluded from the chart and the performance numbers. In the current environment for mutual-fund distribution, sales charges are often waived for purchases of new shares through investment advisers.


    FactSet

    Here’s a comparison of returns for 2022 and average annual returns for various periods of the fund’s Class A shares to that of the S&P 500 and its Morningstar fund category through Oct. 18:

     

    		 Total return – 2022 through Oct. 18

    		 Average return – 3 Years

    		 Average return – 5 Years

    		 Average return – 10 years
    Vaughan Nelson Select Find – Class A

    		 -20.2%

    		 11.8%

    		 10.8%

    		 13.0%
    S&P 500

    		 -21.0%

    		 9.4%

    		 9.7%

    		 12.0%
    Morningstar Large Blend category

    		 -20.3%

    		 8.1%

    		 8.2%

    		 10.7%
    Sources: Morningstar, FactSet

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  • It’s the 35th anniversary of the 1987 stock-market crash: What investors need to know

    It’s the 35th anniversary of the 1987 stock-market crash: What investors need to know

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    Investors suffering motion sickness from the stock market’s wild October swings probably don’t want to hear about it, but Wednesday marks the 35th anniversary of the single ugliest day in stock-market history.

    On Oct. 19, 1987, the Dow Jones Industrial Average
    DJIA,
    +0.01%
    plunged 508 points, a decline of almost 23%, in a daylong selling frenzy that ricocheted around the world and tested the limits of the financial system. The S&P 500
    SPX,
    -0.37%
    dropped more than 20%. At current levels, an equivalent percentage drop would translate into a one-day loss of over 7,000 points for the Dow.

    Read: Wall Street pros recall ‘sheer panic’ of October 1987 stock-market crash

    Could it happen again? There are some important differences between the 1987 and 2022 market environment.

    Marketwide circuit breakers put in place following the crash force 15-minute trading halts after declines of 7% and 13% and then close the market for the day after a drop of 20%.

    “Is it possible to be down 20% in a day? Sure, but not before we have to check our wits a couple of times first,” Liz Young, head of investment strategy at SoFi, told MarketWatch in a phone interview.

    Those circuit breakers were last triggered in March 2020, when stocks plunged sharply at the onset of the COVID-19 pandemic.

    See: Here’s one key factor that amplified the 1987 stock-market crash

    “The other big difference is that we’ve already gone down 20% this year,” Young said. While there may be more downside, it’s difficult to see what could trigger a comparable one-day downdraft.

    Black Monday didn’t come out of the blue. The S&P 500 fell 3% on Oct. 14, 2.3% on Oct. 15, and 5.2% on Oct. 16, the Wednesday-Friday stretch before the fateful day, recalled Nicholas Colas, co-founder of DataTrek Research, in a note earlier this week.

    But the S&P 500 had gained 32.9% from January through September 1987, while it’s been downhill for stocks this year since the large-cap benchmark scored a record finish on Jan. 3.

    It’s also a reminder that stock-market drops don’t have to happen all at once. 2008 was a “longer slog lower with bouts of deep selling,” noted Ross Mayfield, investment strategy analyst at Baird, in a phone interview.

    And while risk versus return dynamics are starting to look more attractive for long-term investors, the market can still go lower from here, he said.

    The Dow and S&P 500 ended Friday at their lowest levels since 2020. They’ve bounced back over the first two trading sessions of this week, leaving the S&P 500 down 22% year to date through Tuesday’s close, the Dow down 16% and the tech-heavy Nasdaq Composite
    COMP,
    -0.60%
    off more than 30%. All three major indexes are mired in bear markets.

    Stock-index futures pointed to moderate losses for major indexes Wednesday morning.

    Aggressive tightening of monetary policy by the Federal Reserve in an effort to rein in persistently hot inflation has sparked a sharp rise in Treasury yields, unsettling stocks as investors fear the effort will push the economy into recession.

    Read: Why stock market investors should wait for the 10-year Treasury to ‘blink’

    This October, however, has certainly been volatile. The S&P 500 has finished with a gain or loss of more than 1% in 8 of the 12 trading days seen so far this month. The Cboe Volatility Index
    VIX,
    +3.25%    ,
    an options-based measure of expected volatility over the next 30 days, remains elevated above 30, signaling investors expect choppy trading to continue.

    The 1987 crash remains a “relevant case study in extreme volatility,” Colas wrote.

    The S&P 500 bounced back the next two days following the Oct. 19 crash by 5.3% and 9.1%, but stumbled 8.3% the following Monday, leaving it essentially unchanged from its Black Monday close to its closing level a week later, he observed. The S&P 500 didn’t bottom until Dec. 4, then went on to rally 10.3% into year-end.

    That shows that buying the close of an outsize “dip” may yield good short-term trading returns, but the market might still need to retest the lows before moving sustainably higher, Colas said.

    It’s also worth noting that the 1987 crash is often described as the origin of the so-called Fed “put,” he said. That’s the idea that the Fed will respond to plunging asset prices with extraordinary measures.

    With inflation soaring, the Fed is widely seen as unable or unwilling to ride to the market’s rescue, with some arguing that the central bank may actually be cheering for market-based pain to tighten financial conditions and help get inflation under control. The analyst noted that year-over-year inflation as measured by the consumer-price index was 4.4% in October 1987, around half its September 2022 level of 8.2%.

    “Just to be clear, we don’t think there is a another 1987-style crash in the offing, but the current economic environment certainly leaves the Fed with fewer options and less desire to support equity prices than 35 years ago,” Colas said.

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  • Stocks are rallying now, but the 9 painful stages of this bear market are not even halfway done

    Stocks are rallying now, but the 9 painful stages of this bear market are not even halfway done

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    The official definition of a bear market is a 20% or greater decline from an index’s previous high. Accordingly, the three major U.S. stock-market benchmarks — the Nasdaq
    COMP,
    +0.90%    ,
    the S&P 500
    SPX,
    +1.14%
    and the Dow Jones Industrial Average
    DJIA,
    +1.12%
    — are currently all in a bear market.

    Based on my work with stock market strategist Mark D. Cook, a typical bear market goes through nine stages. Right now we are in Stage 4. Keep in mind that a bear market does not always follow these stages in the exact order. 

    1. Failed rallies: Failed rallies represent the first clue that a bear market is here. Failed rallies often appear before the market “officially” becomes a bear market. If the rally doesn’t have legs and cannot go higher for the next few days or weeks, it confirms that the bear’s claws have sunk in. Along the way, many failed rallies will fool bulls into thinking the worst is over. Watch the rallies for bear-market clues. The rally so far this week is an example. Now in its second day, a failure of this rally would confirm that stocks are not yet out of a bear market.

    2. Low-volume rallies: Another bear market clue is that stocks move higher on low volume. This is a clue the major financial institutions aren’t buying, although algos and hedge funds might be. It’s easy for the algos to push prices higher in a low-volume environment, one of the reasons for monster rallies that go nowhere the following day (i.e. a “one-day wonder”). 

    3. Terrible-looking charts: The easiest way to identify a bear market is by looking at a stock chart. It goes without saying that the charts look dreadful, both the daily and the weekly. While rallies help relieve some of the pressure, they typically don’t last long.

    4. Strong selloffs: It’s been a couple of years since markets have experienced extremely strong selloffs, but that record was broken the week of September 26 when the S&P 500 hit a new low for 2022. These strong selloffs are typical of a bear market, followed by rallies that don’t last (a roller-coaster that so far has played out during October).

    5. Mutual-fund redemptions: During this stage, after looking at their quarterly and monthly statements, horrified investors throw in the towel and sell their mutual funds (also, some investors refuse to look at those reports). As a result, mutual fund companies are forced to sell (which negatively affects the stock market). Typically, when the indexes fall more than 20%, mutual fund redemptions increase. 

    6. Complacency turns to panic: As more investor money leaves the market, many investors panic. The most bullish investors are holding on for dear life but are buying fewer stocks. The most nervous investors sell to avoid risking precious gains. 

    7. All news is bad news: As the bear market pushes stock prices lower, it seems as if most economic data and financial news is negative. Many people become skeptical of the bullish predictions from market professionals, who earlier had promised the market would keep going up. In the depths of the worst bear markets, some bullish professionals are jeered or ignored. Even die-hard bulls are increasingly nervous as the market heads lower and lower (with occasional rallies along the way). 

    8. Bulls throw in the towel: As trading volume increases on down days, and some investors experience 30% or higher losses, they give up hope and sell. The market turns into a free-for-all as even the Fed appears to have lost control. Many in the media admit that a bear market has arrived. 

    9. Capitulation: After weeks and months of selloffs (and occasional rallies), many investors are panicked. Investors realize that it may take years before their portfolios will return to breakeven, and some stocks never will. In the final stage of a bear market, trading volume is more than three times higher than normal. Even some of true believers liquidate positions, as many portfolios are down by 40% or 50% and more. Almost every financial asset has fallen, with the exception of fixed income such as CDs and T-bills. Traders or investors who trade on margin feel the most pain.

    Read: ‘Material risk’ looms over stocks as investors face bear market’s ‘second act,’ warns Morgan Stanley

    Take action

    This bear market is fairly young, but already there have been so many failed rallies that many investors are too afraid to buy. Some investors with cash are looking for bargains, but it takes nerves of steel to buy when everyone is selling.

    One of the keys to success in the market is to buy what people don’t want. Here are several ideas of what to do (and it is not too late to act): 

    1. During bear markets, a key to survival is diversification. If you are patient and are willing to hold positions for years, dollar-cost average into index funds on the way down. 

    2. In the early stages of a bear market, consider moving to the sidelines with CDs or Treasury bills. 

    3. Consider building a strong cash position, although inflation will cut into some of those gains. Nevertheless, losing to inflation is better than losing 30% in the stock market. The goal is not to lose money; in a bear market, cash is king. 

    The length and volatility of every bear market is different. No one can predict how this one will turn out, but based on previous bear markets, there’s still a long way to go before it’s over. 

    Michael Sincere (michaelsincere.com) is the author of “Understanding Options” and “Understanding Stocks.” His latest book, “How to Profit in the Stock Market” (McGraw Hill, 2022), explores bull -and bear market investing strategies. 

    More: Could there be a stock market rally? Probably. Would it be the end of the bear market? Probably not.

    Also read: Whatever you’re feeling now about stocks is normal bear-market grief — and the worst is yet to come

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  • ‘Material risk’ looms over stocks as investors face bear market’s ‘second act,’ warns Morgan Stanley

    ‘Material risk’ looms over stocks as investors face bear market’s ‘second act,’ warns Morgan Stanley

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    Stock-market investors have been adjusting to the jump in interest rates amid high inflation, but they have yet to cope with profit headwinds faced by the S&P 500, according to Morgan Stanley Wealth Management.

    “While a rate peak may solidify estimates for the equity risk premium and valuation multiples, equity investors still face the bear market’s second act — the earnings outlook,” said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management, in a note Monday. 

    “They have been slow to recognize that pricing power and operating margins, which hit all-time highs in the past two years, are unsustainable,” she said. “Even without a recession, the mean reversion of profits in 2023 translates to a 10%-to-15% decline from current estimates.”


    MORGAN STANLEY WEALTH MANAGEMENT NOTE DATED OCT. 17 2022

    Unprecedented monetary and fiscal stimulus during the throes of the pandemic had led to the largest U.S. companies booking record operating margins that were 150 to 200 basis points above norms seen in the past decade, according to Shalett. 

    See: Stock market’s wild gyrations put earnings in focus as inflation crushes Fed ‘pivot’ hopes

    She said that company profits may now be imperiled by slowing growth, with “demand skewing toward services” after pulling forward toward goods earlier in the pandemic, and a likely reversal in “extremely strong” pricing power as the Fed fights surging inflation with interest-rate hikes.

    “Such risks are not discounted in 2023 consensus yet, constituting a material risk to stocks for the remainder of the year,” Shalett said.

    While many sectors have discounted the potential drop in 2023 profits from current estimates that could stir headwinds even with no recession, “the megacap secular growth stocks that dominate market-cap indexes have not,” she warned. “And those indexes are where risk gets repriced in the bear market’s final stages.”

    Morgan Stanley’s chief U.S. equity strategist Mike Wilson estimates as much as 11% downside from consensus estimates, with his base-case, earnings-per-share forecast for the S&P 500 for 2023 being $212, according to Shalett’s note. 

    U.S. stocks were bouncing Monday, with major stock benchmarks trading sharply higher in the afternoon, after sinking Friday amid inflation concerns as earnings season got under way. The S&P 500
    SPX,
    +2.65%
    was up 2.7% in afternoon trading, while the Dow Jones Industrial Average
    DJIA,
    +1.86%
    gained 1.9% and the technology-heavy Nasdaq Composite surged 3.5%, FactSet data show, last check. 

    In the bond market, Treasury rates were trading slightly lower Monday afternoon, after the 2-year yield hit a 15-year high and the 10-year yield notched a 14-year high on Friday, according to Dow Jones Market Data. Two-year yields ended last week at 4.507%, the highest level since August 8, 2007 based on 3 p.m. Eastern time levels, while the 10-year rate climbed to 4.005% for its highest rate since Oct. 15, 2008.

    The yield on the 10-year Treasury note
    TMUBMUSD10Y,
    3.992%
    was down about 1 basis point Monday afternoon at around 4%, while two-year yields
    TMUBMUSD02Y,
    4.439%
    fell about five basis points to around 4.45%, FactSet data show, at last check.

    Meanwhile, as investors capitulated to higher inflation, “peak policy rates moved up aggressively in the fed funds futures market, with the terminal rate now at nearly 5%, an aggressive stance that smacks of ‘peak hawkishness,’” according to the Morgan Stanley note.

    “Critically, although the market is still pricing 1.5 cuts in 2023, the January 2024 fed-funds rate is estimated at 4.5%, a comfortable 100 basis points above our forecast” for core inflation measured by the consumer-price index, Shalett wrote.

    “Consider locking in solid short-term yields in bonds and shoring up positions in high growth, dividend-paying stocks,” she said. “Short-duration Treasuries look attractive, especially because the yield is more than 2.5 times that of the dividend yield on the S&P 500.”

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  • These 11 stocks can lead your portfolio’s rebound after the S&P 500 ‘earnings recession’ and a market bottom next year

    These 11 stocks can lead your portfolio’s rebound after the S&P 500 ‘earnings recession’ and a market bottom next year

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    This may surprise you: Wall Street analysts expect earnings for the S&P 500 to increase 8% during 2023, despite all the buzz about a possible recession as the Federal Reserve tightens monetary policy to quell inflation.

    Ken Laudan, a portfolio manager at Kornitzer Capital Management in Mission, Kan., isn’t buying it. He expects an “earnings recession” for the S&P 500
    SPX,
    +2.78%
    — that is, a decline in profits of around 10%. But he also expects that decline to set up a bottom for the stock market.

    Laudan’s predictions for the S&P 500 ‘earnings recession’ and bottom

    Laudan, who manages the $83 million Buffalo Large Cap Fund
    BUFEX,
    -2.86%
    and co-manages the $905 million Buffalo Discovery Fund
    BUFTX,
    -2.82%    ,
    said during an interview: “It is not unusual to see a 20% hit [to earnings] in a modest recession. Margins have peaked.”

    The consensus among analysts polled by FactSet is for weighted aggregate earnings for the S&P 500 to total $238.23 a share in 2023, which would be an 8% increase from the current 2022 EPS estimate of $220.63.

    Laudan said his base case for 2023 is for earnings of about $195 to $200 a share and for that decline in earnings (about 9% to 12% from the current consensus estimate for 2022) to be “coupled with an economic recession of some sort.”

    He expects the Wall Street estimates to come down, and said that “once Street estimates get to $205 or $210, I think stocks will take off.”

    He went further, saying “things get really interesting at 3200 or 3300 on the S&P.” The S&P 500 closed at 3583.07 on Oct. 14, a decline of 24.8% for 2022, excluding dividends.

    Laudan said the Buffalo Large Cap Fund was about 7% in cash, as he was keeping some powder dry for stock purchases at lower prices, adding that he has been “fairly defensive” since October 2021 and was continuing to focus on “steady dividend-paying companies with strong balance sheets.”

    Leaders for the stock market’s recovery

    After the market hits bottom, Laudan expects a recovery for stocks to begin next year, as “valuations will discount and respond more quickly than the earnings will.”

    He expects “long-duration technology growth stocks” to lead the rally, because “they got hit first.” When asked if Nvidia Corp.
    NVDA,
    +6.14%
    and Advanced Micro Devices Inc.
    AMD,
    +3.69%
    were good examples, in light of the broad decline for semiconductor stocks and because both are held by the Buffalo Large Cap Fund, Laudan said: “They led us down and they will bounce first.”

    Laudan said his “largest tech holding” is ASML Holding N.V.
    ASML,
    +3.79%    ,
    which provides equipment and systems used to fabricate computer chips.

    Among the largest tech-oriented companies, the Buffalo Large Cap fund also holds shares of Apple Inc.
    AAPL,
    +3.09%    ,
    Microsoft Corp.
    MSFT,
    +3.88%    ,
    Amazon.com Inc.
    AMZN,
    +6.63%
    and Alphabet Inc.
    GOOG,
    +3.91%

    GOOGL,
    +3.73%    .

    Laudan also said he had been “overweight’ in UnitedHealth Group Inc.
    UNH,
    +1.77%    ,
    Danaher Corp.
    DHR,
    +2.64%
    and Linde PLC
    LIN,
    +2.25%
    recently and had taken advantage of the decline in Adobe Inc.’s
    ADBE,
    +2.32%
    price following the announcement of its $20 billion acquisition of Figma, by scooping up more shares.

    Summarizing the declines

    To illustrate what a brutal year it has been for semiconductor stocks, the iShares Semiconductor ETF
    SOXX,
    +2.12%    ,
    which tracks the PHLX Semiconductor Index
    SOX,
    +2.29%
    of 30 U.S.-listed chip makers and related equipment manufacturers, has dropped 44% this year. Then again, SOXX had risen 38% over the past three years and 81% for five years, underlining the importance of long-term thinking for stock investors, even during this terrible bear market for this particular tech space.

    Here’s a summary of changes in stock prices (again, excluding dividends) and forward price-to-forward-earnings valuations during 2022 through Oct. 14 for every stock mentioned in this article. The stocks are sorted alphabetically:

    Company

    		 Ticker

    		 2022 price change

    		 Forward P/E

    		 Forward P/E as of Dec. 31, 2021
    Apple Inc.

    		 AAPL,
    +3.09%         		-22%

    		 22.2

    		 30.2
    Adobe Inc.

    		 ADBE,
    +2.32%         		-49%

    		 19.4

    		 40.5
    Amazon.com Inc.

    		 AMZN,
    +6.63%         		-36%

    		 62.1

    		 64.9
    Advanced Micro Devices Inc.

    		 AMD,
    +3.69%         		-61%

    		 14.7

    		 43.1
    ASML Holding N.V. ADR

    		 ASML,
    +3.79%         		-52%

    		 22.7

    		 41.2
    Danaher Corp.

    		 DHR,
    +2.64%         		-23%

    		 24.3

    		 32.1
    Alphabet Inc. Class C

    		 GOOG,
    +3.91%         		-33%

    		 17.5

    		 25.3
    Linde PLC

    		 LIN,
    +2.25%         		-21%

    		 22.2

    		 29.6
    Microsoft Corp.

    		 MSFT,
    +3.88%         		-32%

    		 22.5

    		 34.0
    Nvidia Corp.

    		 NVDA,
    +6.14%         		-62%

    		 28.9

    		 58.0
    UnitedHealth Group Inc.

    		 UNH,
    +1.77%         		2%

    		 21.5

    		 23.2
    Source: FactSet

    You can click on the tickers for more about each company. Click here for Tomi Kilgore’s detailed guide to the wealth of information available free on the MarketWatch quote page.

    The forward P/E ratio for the S&P 500 declined to 16.9 as of the close on Oct. 14 from 24.5 at the end of 2021, while the forward P/E for SOXX declined to 13.2 from 27.1.

    Don’t miss: This is how high interest rates might rise, and what could scare the Federal Reserve into a policy pivot

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  • Dow climbs nearly 600 points as stocks open sharply higher after Friday’s punishing selloff

    Dow climbs nearly 600 points as stocks open sharply higher after Friday’s punishing selloff

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    U.S. stocks opened sharply higher on Monday, with the Dow Jones Industrial Average advancing nearly 600 points, as stocks rebounded following Friday’s punishing selloff. The S&P 500
    SPX,
    +2.73%
    climbed 80 points, or 2.3%, to 3,663. The Dow
    DJIA,
    +1.93%
    gained 568 points, or 1.9%, to 30,203. The Nasdaq Composite
    COMP,
    +3.27%
    advanced 276 points, or 2.7%, to 10,598. Analysts attributed the risk-friendly mood in U.S. markets to the latest news out of the U.K., where the newly installed Chancellor of the Exchequer Jeremy Hunt abandoned the majority of the £45 billion ($50.9 billion) in previously announced unfunded tax cuts, sparking a sharp rally in U.K. government bonds, known as gilts.

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  • Weekend reads: The Federal Reserve gets a lot of flak for inflation, but it has actually hit its target recently

    Weekend reads: The Federal Reserve gets a lot of flak for inflation, but it has actually hit its target recently

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    The U.S. stock market benchmark rebounded from a steep loss on the day when the government published hot inflation numbers.

    The S&P 500 Index ended Thursday with a 2.6% gain after investors took a closer look and saw a significant improvement from July through September, as Rex Nutting explained.

    The whipsaw action wasn’t limited to stocks, and was described by Rick Rieder, the chief investment officer for global fixed income at BlackRock, as “one of the craziest days” of his career.

    The bond market’s warning

    Some investors who focus on stocks might not realize that the bond market is much larger, and that its movements can cause government and central-bank policies to shift. Larry McDonald, founder of The Bear Traps Report and author of “A Colossal Failure of Common Sense,” which described the 2008 failure of Lehman Brothers, explained just how bad the action was in the U.K. bond market over the past few weeks, when 30-year government bonds issued in December traded as low as 24 cents on the dollar. He also predicted what will happen if the Federal Reserve continues on its current course of interest-rate increases.

    Related outlooks for interest rates:

    Bullish signs for long-term stock investors

    Getty Images

    Michael Brush argues the Federal Reserve is moving too quickly to raise interest rates and cool the U.S. economy. He expects a rapid decline in inflation and a new bull market for stocks. In a column, he shares five sentiment indicators that suggest it is time to buy stocks — especially this group of companies.

    More: Here’s how you’ll know stock-market lows are finally here, says the legendary investor who called 1987 crash

    Don’t forget to look over your portfolio

    Beth Pinsker explains how to make sure your investments are best diversified to fit your needs during time of uncertainty in all financial markets.

    Read on: $22 billion in I-bond sales can’t be wrong. Why you may want to buy them even when their rate resets soon

    Time for a refreshing COLA if you are on Social Security

    Getty Images

    The Social Security Administration has announced that its cost-of-living adjustment (COLA) for 2023 will be 8.7%, the largest increase in four decades. There is more to the story, including tax implications and changes to Medicare, as Jessica Hall and Alessandra Malito explain.

    Related: Can I stop and restart Social Security benefits?

    Pay attention to Medicare open enrollment

    Getty Images/iStockphoto

    Medicare’s annual open enrollment season runs from Oct. 15 to Dec. 7. The majority of Medicare recipients don’t review their plans each year, which can cost them a lot of money. Here’s how to approach Medicare’s 2023 enrollment period.

    You won’t like this ‘new normal’ for the housing market

    West Coast housing markets are already seeing price declines as mortgage loan rates hit 7%.


    Stefani Reynolds/Agence France-Presse/Getty Images

    Freddie Mac said interest rates on 30-year mortgage loans averaged 6.92% on Oct. 13, up from 3.05% a year earlier. Mortgage Daily said rates had hit 7.10% — the highest in 20 years — and economists are warning these levels could be a “new normal.”

    A homeowner locked-in with a low interest rate on their mortgage loan will be reluctant to sell. And some would-be buyers may now be priced out of the market because of much higher loan payments. Here’s what economists expect for home prices in 2023.

    More housing coverage from Aarthi Swaminathan: ‘No housing market is immune to home-price declines’: Home values are already falling in these pandemic boomtowns.

    Tips for maximizing financial aid for college

    Getty Images/iStockphoto

    When you fill out the Free Application for Federal Student Aid, or FAFSA, to help pay for your child’s college education, there may be a problem — old news. The form reflects your financial situation up to two years ago, and things may have worsened recently. Here’s how to make sure schools have the most recent information to help you get as much financial aid as possible.

    This is why Florida’s insurance market is such a mess

    Florida insurers are not only suffering from storm-damage payouts.


    Joe Raedle/Getty Images

    Hurricanes are nothing new to Floridians, but insurers in the state are losing money even though premiums have doubled over the past five years. Shahid S. Hamid, the director of the Laboratory for Insurance at Florida International University, explains why the Florida insurance market is so distorted.

    Here’s a travel option you may never have heard of — home swapping

    Villefranche-sur-mer on the French Riviera.


    istock

    Home swapping can give you an opportunity to live as a local in a faraway place while spending much less than you would as a tourist. Here’s how it works.

    Want more from MarketWatch? Sign up for this and other newsletters, and get the latest news, personal finance and investing advice.

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  • Inflation expectations rise in October as consumer mood stays somber

    Inflation expectations rise in October as consumer mood stays somber

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    The numbers: Consumer sentiment rose slightly to 59.8 in October even as Americans’ expectations for inflation worsened, according to a Friday survey.

    The University of Michigan’s gauge of consumer attitudes added 1.2 index points from 58.6 in September.

    Economists were expecting a reading of 59, according to a Wall Street Journal poll.

    Consumer expectations for inflation over the next year rose to 5.1% from September’s one-year low of 4.7%, while expectations for inflation over the next 5 years ticked up to 2.9% from 2.7% last month.

    Big picture: Americans are facing rising costs for key items like food and shelter as well as the impact of higher interest rates and the growing chance of a serious economic slowdown.

    “Sentiment is now 9.8 points above the all-time low reached in June, but this improvement remains tentative, as the expectations index declined by 3% from last month,” wrote Joanne Hsu, director of the survey, on Friday. “Continued uncertainty over the future trajectory of prices, economies, and financial markets around the world indicate a bumpy road ahead for consumers.”

    Key details: A  gauge of consumer’s views of current conditions rose in October to 65.3 from 59.7 in September, while an indicator of expectations for the next six months fell to 56.2 from 58 last month.

    Market reaction: U.S. stocks were trading mixed Friday morning, with the Dow Jones Industrial Average
    DJIA,
    -1.34%
    posting gains and the S&P 500
    SPX,
    -2.37%
    index showing slight losses.

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  • JPMorgan profit falls but beats estimates while Wells Fargo misses

    JPMorgan profit falls but beats estimates while Wells Fargo misses

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    JPMorgan Chase & Co. shares rose Friday after the megabank beat analyst targets for third-quarter profit and revenue and said it would top forecasts for its net interest in come in the coming quarter.

    In a busy day for bank earnings, Wells Fargo & Co.
    WFC,
    +4.62%
    fell short of earnings target but its stock rose in premarket trades as it beat revenue estimates.

    Morgan Stanley
    MS,
    +3.55%
    shares fell after it missed Wall Street’s targets for earnings and revenue.

    Citigroup Inc.
    C,
    +5.17%
    shares rose after beating its profit mark, although revenue fell 1% after breaking out the impact of divestitures.

    Overall, banks benefited from higher interest rates and strong trading volumes, but investment banking deal activity fell sharply. Banks also channeled more capital into reserves and away from their collective bottom lines to prepare for a potential economic downturn.

    As the largest bank in the U.S. and a bellwether for the sector, JPMorgan Chase
    JPM,
    +5.56%
    turned in a “solid performance” in the latest quarter, in the words of Chief Executive Jamie Dimon.

    The bank said it expects to meet its capital requirements under the international Basel III banking guidelines and resume stock buybacks early in 2023.

    “In the U.S., consumers continue to spend with solid balance sheets, job openings are plentiful and businesses remain healthy,” Dimon said. “However, there are significant headwinds immediately in front of us – stubbornly high inflation leading to higher global interest rates, the uncertain impacts of quantitative tightening, the war in Ukraine, which is increasing all geopolitical risks, and the fragile state of oil supply and prices.”

    Dimon said the bank remains “prepared for bad outcomes” so it can continue to operate even in the most challenging times.

    Dimon’s prepared statement comes a day after the oft-quoted CEO said the U.S. consumer sector remains strong currently, but inflation will start weighing on people by 2023.

    Also Read: JPMorgan CEO Dimon says inflation hasn’t dampened consumer spending yet but give it time

    JPMorgan Chase’s stock rose 2.4% ahead of Friday’s open after it said its third-quarter net income fell 16.7% to $9.74 billion, or $3.12 a share, from $11.69 billion, or $3.74 a share, in the year-ago quarter.

    Third-quarter revenue at the megabank rose to $32.72 billion from $29.65 billion in the year-ago quarter.

    Wall Street analysts expected JPMorgan Chase to earn $2.90 a share on revenue of $32.12 billion, according to estimated compiled by FactSet. T

    The bank said a net credit reserve build of $808 million ate into its net income for the latest quarter, compared with a net reserve release of $2.1 billion in the prior year.

    Net interest income climbed 34% to $17.6 billion and net interest income excluding its Markets unit rose 51% to $16.9 billion on higher interest rates.

    JPMorgan Chase’s total assets under management fell 13% to $2.6 trillion in the face of losses in the equities market and difficult conditions in the bond market.

    Looking ahead, JPMorgan Chase said it expects fourth-quarter net interest income of about $19 billion, ahead of the $18.2 billion analyst estimate.

    Octavio Marenzi, CEO of management consultant company Opimas said the bank’s results were “surprisingly solid” and if you strip away its payments for loan reserves, its profit is basically unchanged.

    “Individual lines of business, such as investment banking and mortgages did predictably badly, but this was more than compensated for by strength in other areas of lending and in trading,” Marenzi said.

    Shares of JPMorgan Chase have lost 30.9% in 2022 compared with a 17.3% drop by the Dow Jones Industrial Average
    DJIA,
    +2.83%
    and a 23.0% loss by the S&P 500
    SPX,
    +2.60%    .

    Wells Fargo misses profit target but share rise

    Wells Fargo & Co. shares advanced 2% in Friday’s premarket after the bank posted net income of $3.528 billion, or 85 cents a share, for the quarter to end September, down from $5.122 billion, or $1.17 a share, in the year-earlier quarter.

    The megabank fell short of the earnings-per-share target of $1.09 a share.

    Wells Fargo’s revenue rose to $19.505 billion from $18.834 billion a year ago, ahead of the $18.775 billion FactSet consensus.

    Chief Executive Charlie Scharf said performance was “significantly impacted” by $2 billion, or 45 cents a share, in operating losses “related to litigation, customer remediation, and regulatory matters primarily related to a variety of historical matters.”

    However, the bank is seeing historically low delinquencies and high payment rates, and the “timing of deterioration in those measures due to high inflation remains unclear. “

    The bank set aside $784 million in provisions for loan losses, after reducing them by $1.395 billion a year ago.

    Net interest income rose 36%, while noninterest income fell 25%, as mortgage banking income declined.

    Citi analyst Keith Horowitz said Wells Fargo turned in a “good” quarter overall, although larger-than-expected one-time charges and a reserve build reduced profits. But Wells Fargo also raised its outlook for net interest income “and we still see upside to 2023 consensus,” Horowitz said.

    Shares of Wells Fargo have declined 12% in the year to date.

    Morgan Stanley shares fall on results

    Morgan Stanley fell 2.6% in premarket trades after the investment bank missed Wall Street’s targets for earnings and revenue amid a drop in deal activity.

    Morgan Stanley said its third-quarter net income fell to $2.49 billion, or $1.47 per share, from net income of $3.7 billion, or $1.98 per share in the year-ago quarter.

    Third-quarter revenue dropped to $12.99 billion from $14.75 billion.

    Wall Street analysts were looking for earnings of $1.52 a share and revenue of $13.29 billion, according to FactSet data.

    “Firm performance was resilient and balanced in an uncertain and difficult environment, delivering a 15% return on tangible common equity,” said CEO James Gorman. “Wealth Management added an additional $65 billion in net new assets and produced a pre-tax margin of 28%, excluding integration-related expenses, demonstrating scale and stability despite declining asset values.”

    Morgan Stanley shares have lost 19.2% in 2022.

    Citi beats targets but shares lose ground

    Citigroup shares fell 1.3% in premarket trades Friday after the bank posted stronger-than-expected profit, but revenue fell 1% after breaking out divestiture-related impacts, as growth in net interest income was more than offset by lower non-interest revenue.

    Citi said its third-quarter net income dropped to $3.5 billion, or $1.63 per share, from $4.6 billion, or $2.15 a share, in the year-ago quarter.

    Excluding divestiture-related impacts, earnings were $1.50 a share.

    Total revenue increased to $18.5 billion from $17.4 billion.

    Analysts were looking for earnings of $1.42 a share and revenue of $18.26 billion for Citigroup, according to a FactSet survey.

    Citi said it continues to shrink its operations in Russia, and expects to end nearly all of the institutional banking services offered in the country next quarter. “To be clear, our intention is to wind down our presence in this country,” Chief Executive Jane Fraser said.

    Shares of Citigroup have dropped 28.9% in 2022.

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  • Josh Brown on the next five years in markets: ‘You actually can earn yield.’

    Josh Brown on the next five years in markets: ‘You actually can earn yield.’

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    As MarketWatch turns 25, we wanted to know what top investing minds think we will be covering for the next five years. So we turned to the Reformed Broker and things got a little crazy. 

    For years, Josh Brown has been one of MarketWatch’s favorite market commentators and personalities. We knew him before he was a big shot CNBC regular and CEO of Ritholtz Wealth Management. He blogged a lot on his web site, The Reformed Broker, that he started in 2008, and found a devoted audience that wanted to hear his blunt and straightforward views on Wall Street, books he was reading, even his music preferences. 

    By early 2020, MarketWatch was writing about Brown’s “budding media empire,” which included 1 million twitter followers, blogs that generated 1.7 million page views monthly, and a YouTube channel with more than 20,000 subscribers. 

    As MarketWatch turns 25, we asked Brown what he thought we would be covering in the next five years. Here are his lightly edited comments:

    What do you think you’ll be reading in MarketWatch in the next five years? 

    Brown:  I think on MarketWatch in the next five years I will be reading a lot about inflation and then eventually disinflation and then maybe deflation. Hopefully not. But I do think probably a lot of what will be driving trends in the market will have to do with interest rates and macroeconomic concerns. It’s always been that way, but it seems even more extreme now. 

    What opportunities do you see today that you think might be more clear in the next five years? 

    Brown: It’s pretty obvious that large corporations and governments will mostly address the labor shortage by putting in software and robots. So I think anything that has to do with automation is a pretty safe bet over the next 5 to 10 years. That’s probably how we’re going to in part solve inflation. We’re going to drive the cost of doing business down via automation. It’s not part of the future. It’s the present. It’s already happening. 

    What do you fear that you’ll be reading about in MarketWatch in the next five years? 

    Brown: I really hope that no one’s reading about any personal scandals of mine in the next five years at MarketWatch. In fact, I think about it every day. 

    What opportunities do you see today in the financial markets that might be more clear in five years? 

    The 40% of a classical 60/40 portfolio now has a bigger role other than just stabilization. Like you actually can earn yield. It’s not yet a positive real yield because inflation is so high, but it’s nice for it not to be zero. So one really great idea is to go back to basics. And when you’re constructing a portfolio, don’t just think about return on investment, but think about return of investment. Being able to buy high quality muni bonds and treasuries right now, at the current rates, I think it will look like a gift sometime in the near future. 

    Last question. What do you fear that you’ll be reading about financial markets and investors in the next five years? 

    Brown: I’m not a fearful person. We will go through good times. This is the worst year since 1970 for an investor with any kind of portfolio. You have a full-scale collapse in fixed income right at the moment when you needed it because stocks have been collapsing and the high of the year was January 1st. Like, this is as bad as it gets. So we’ll make it. We’ll do this again in 2023. There will be a whole other list of things that could go wrong. But overall, I don’t invest as though I’ll be the last investor. Someone will come later. They’ll take risk, too. It’s just an ebb and flow of uncertainty. Right now. It feels like there’s a lot of uncertainty with good reason. Those aren’t the times to be most nervous. The times to be most nervous is when everyone is completely certain of what they’re doing. So we’re not there now. And that’s the good news.

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  • U.S. stocks edge up despite higher-than-expected inflation data

    U.S. stocks edge up despite higher-than-expected inflation data

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    U.S. stock indexes edged higher on Wednesday, while hotter-than-expected producer price inflation data deepened concerns that the Federal Reserve may continue its aggressive interest rate hikes.

    How are stock-index futures trading
    • The Dow Jones Industrial Average 
      DJIA,
      +0.50%
       was up 120 points, or 0.4% to around 29,355

    • The S&P 500 
      SPX,
      +0.35%
      gained 5.3 points, or 0.2% to about 3,594

    • The Nasdaq Composite
      COMP,
      -6.31%
      traded 5.1 points, or 0.1% higher to 10,430

    On Tuesday, the Dow Jones Industrial Average rose 36 points, or 0.12%, to 29239, the S&P 500 declined 24 points, or 0.65%, to 3589, and the Nasdaq Composite dropped 116 points, or 1.1%, to 10426. The S&P 500 closed down 1,177 points, or 24.7% for the year to date.

    What’s driving markets

    The 12-month rate of producer price inflation slowed to to 8.5% from 8.7% while the annual core rate, excluding food and energy, was unchanged at 5.6%, but the monthly rate rose 0.4% in September, above forecast, and the monthly core PPI was also up 0.4% in September.

    Such data has worsened fears that to curb inflation, the Fed will continue its aggressive rate hikes, which may steer the U.S. economy into a recession.

    “We believe the odds of a recession in 2023 are now better than 50%,” Greg Bassuk, chief executive at AXS Investments, wrote in a Wednesday note. “Last week’s market turbulence saw volatility at levels we have not seen since July, and we believe investors should brace for ongoing market volatility and uncertainty throughout Q4, in concert with another likely Fed interest rate hike to the tune of 0.75% in November,” according to Bassuk.

    The 10-year Treasury yield BX:TMUBMUSD10Y, which started the year around 1.65% was trading at 3.931% on Wednesday, off 1.3 basis points, after the producer price inflation data.

    Traders are also awaiting U.S. September consumer prices data on Thursday due at 8:30 am Eastern Time.

    “Inflation has proven to be difficult to forecast and given the negative ‘shock’ from the August CPI, it would be difficult for any investor to have conviction going into this report,” according to Tom Lee, head of research at Fundstrat.

    “For us, analyzing the month over month numbers is much more important than looking at the headline,” Zachary Hill, head of portfolio management at Horizon Investments, said in an interview.

    “The way we’ve been thinking about it, the last three months annualized [inflation] gives you a kind of a decent idea of where the shorter term trends are around inflation,” Hill said. “We think that’s what the Fed is going to be looking at to see progress towards their 2% goal. And unfortunately, based on various measures, we’re nowhere near that today.”

    Adding to the market anxiety, and keeping any Wednesday rally in check, is the continuing volatility in U.K. government bonds after the Bank of England reiterated it would stop supporting the market after Friday.

    Investors have become increasingly concerned of late that severe stresses in the financial system may emerge as central banks switch from the era of zero or negative interest rates to sharply higher borrowing costs as they try to tackle inflation at multi-decade highs.

    “[G]lobal financial conditions have tightened as central banks continue to raise interest rates. Our latest Global Financial Stability Report shows that financial stability risks have increased since our last report, with the balance of risks tilted to the downside,” said the International Monetary Fund in a report released on Tuesday.

    “The mood of global investors was gloomy enough and hardly needed yesterday’s reminder from the IMF that the risks to financial stability have increased,” Ian Williams, strategist at Peel Hunt, noted. “Its report highlighted specifically (if obviously) the threats from persistent inflation, China’s slowdown and the war in Ukraine. The highlighted ‘disorderly repricing of risk’ is arguably already underway.”

    The Fed may offer its view on the topic as a number of officials are due to give comments on Wednesday. Minneapolis Fed President Neel Kashkari said the Fed is “dead serious” about getting inflation down. Fed vice chair Michael Barr will speak at 1:45 p.m. The minutes of the Fed’s previous monetary policy setting meeting will be released at 2 p.m. ET and Fed governor Michelle Bowman will deliver comments at 6.30 pm.

    Companies in focus
    • Shares of Philips
      PHIA,
      -12.27%

      PHG,
      -11.33%
      plunged 12% after the Dutch tech company issued its second profit warning this year, forewarning that supply chain problems will impact sales and third-quarter profits.

    • Intel Corp.
      INTC,
      +1.50%
      may fire thousands of workers by the end of the month, around the same time the chip manufacturer reports quarterly results amid a tough year for semiconductor makers, Bloomberg reported late Tuesday. The company’s shares rose 1% Wednesday.

    • Shares of PepsiCo Inc. climbed 4.6% Wednesday, after the beverage and snack giant reported third-quarter profit and revenue that rose above expectations and raised its full-year outlook, as higher prices helped offset some volume weakness.

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