Stocks Grinding Higher in October

Stocks gapped down at the open, but quickly recovered. The Dow is currently down 80 points and the S&P 500 is off .17%. A couple of down-and-out sectors (materials, energy) are in the green, suggesting a continued broadening of the rally outside of ”Magnificent 7” stocks. The bond market has been mixed recently. Short-term bonds are rallying on the change in Fed policy, but long-term bonds are selling off on stronger than expected economic data. The net effect is that the yield curve is normalizing.

This is supposed to be a seasonally weak period of the year, but we’re just not seeing that. Stocks are gradually pushing higher and getting more expensive in the process. But while Wall Street is getting antsy, no one is actually selling. Treasury Partners’ Rich Saperstein says stock valuations (as measured by P/E ratios) are “elevated,” and corporate earnings expectations for 2025 are “inflated.” But he immediately admits, “I’m still fully invested. As a long-term investor I believe in equities.” Blackrock’s Rick Reider says he’s getting more “uncomfortable” about stock market valuations, but believes “money will keep coming into equities” because “there’s so much cash” sitting on the sidelines. Trivariate’s Adam Parker agrees that valuations are a bit concerning. But he points out that many stocks with high P/E ratios are also growing profits very rapidly (i.e. Costco). And investors are always willing to pay-up for growth.

Inflation ticked up last month compared with August, but edged lower on a year-over-year basis. The news media will make a bigger deal of this than is warranted. A more accurate story line is that inflation is in a long-term downtrend even though not every data point is sequentially lower. The annual rate on the Consumer Price Index (CPI) has fallen to 2.4% from 9% over the past 2+ years. And it is poised to moved lower. So if you’re an investor, pay no attention to traders’ continued obsession about the monthly pace of inflation vs. Fed rate cuts. Assessing the overall trend, Federal Reserve Bank of Chicago President Austan Goolsbee believes the job market and inflation have normalized and “We’d like…both of them to stay in the space where they are now.”