If we have ever been confused about whether the recent market correction is driven by the Fed’s interest policy, an incoming recession, Middle East tensions, or high stock valuations, as discussed in the WSJ article (source: link), we may now realize that the primary driving factor behind the market movement is the Fed’s interest policy. This became clearer following the recent Federal Reserve meeting and Jerome Powell’s speech on Wednesday, which confirmed that interest rates would remain unchanged. In other words, for most, interest rates have peaked.
The month of October was marked by dramatic market fluctuations, with indices wavering back and forth, eventually leading to an official correction by the end of the month. While third-quarter earnings, with 49% of S&P 500 companies reporting actual results, have not been disappointing, with 78% of these companies reporting a positive EPS surprise and 62% reporting a positive revenue surprise.
However, the S&P 500 (SPX) experienced a drop of more than 10% from its peak in July by the end of October, breaking its short, mid, and long-term simple moving averages (SMA). Although the indices have been oversold and a powerful rebound occurred in the first week of November, the situation brightened further when the SPX retook the 50-day moving average (MV) on Friday. Additional indicators, such as the Whaley Breath Thrust, even showed a short-term bullish signal at this moment. Nevertheless, for a more convincing picture, it is essential for the SPX to break out beyond its previous high, which is approximately around 4394. This would signal a more robust upward trend in the market.
In October, our long-term investment portfolio saw a -2.78% return, bringing its total gain to 73.22% since May 2020. Conversely, our dynamic investment portfolio experienced a -4.75% return, contributing to an overall return of 23.83% since May 2020 (see our latest performance report). Notably, our structured note portfolio got hit in Q3 by the market correction. We anticipate more favorable returns in Q4, given the historically positive trends in November and December. Additionally, our conservative structured investment, linked to the S&P 500, provides peace of mind to conservative investors, ensuring full principal protection while enabling participation in the market’s growth without concerns about fluctuations.
When considering valuation, the forward 12-month price-to-earnings multiple of the S&P 500 has declined to 17.1x, notably lower than the five-year average of 18.7x and the ten-year average of 17.5x. The conjunction of robust double-digit EPS growth and these below-average valuation multiples sets an optimistic outlook for U.S. stocks as we approach 2024. Additionally, November’s performance stands as a remarkable highlight, marking the strongest month for stocks since 1950. Barring any major macroeconomic shocks, seemingly the market is primed for a resurgence after enduring the challenging sell-off of the past three months.
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