Financials loom as a rare bright light for investors as US equities close out October firmly in the red, hit by rising bond yields and a string of disappointing earnings from notable companies.
Selling this month has been led by the real estate sector and companies paying high dividends, as S&P financials have risen 2.5 per cent. Investors have also rotated away from smaller and mid-capitalised stocks.
In October, the S&P 500 is down 1.9 per cent compared with declines of 2.8 per cent for the S&P MidCap 400 index and 4.5 per cent for the S&P SmallCap 600 index.
The S&P dividend aristocrats index of 50 companies — that have consistently increased their dividends over the past quarter of a century — has dropped 4.7 per cent in October, sharply underperforming the broad market. For 2016, the aristocrats remain 6.9 per cent higher on a total return basis.
Out of the top 30 companies by market value, banks and some large tech companies have led the charge. JPMorgan Chase, Bank of America, Wells Fargo and Citigroup have all rallied more than 3 per cent in October after disclosing better than expected quarterly results.
Microsoft, the software maker, climbed 4 per cent as investors cheered progress in its cloud division and Facebook is up about 2 per cent. In contrast, Amazon fell sharply last week and its shares have lost 5.7 per cent in October after it missed earnings expectations for the third quarter and forecast operating income of as little as zero next quarter.
“We have seen some improvement in the economic outlook and the earnings outlook has improved,” said Alan Gayle, director of asset allocation at RidgeWorth Investments. “People are moving back into [these stocks] as better opportunities to grow into year end.”
Still, he was reluctant to say that interest had yet consolidated around a few names like it did last year when owning the Fangs — Facebook, Amazon, Netflix and Google (now Alphabet) — was a swing factor for portfolio managers’ performance.
“That is a risk, but I don’t think this is a five-stock market,” Mr Gayle said. “We are looking at it more broadly — looking at some of the money that has flowed back into the financial sector and tech.”
Nicholas Colas, chief market strategist at Convergex, said the market’s performance during October “shows that there is a notable large-cap rotation’’ and he attributed that mostly to reweighting after the shares of large companies lagged behind earlier in the year. Year to date, the S&P 500 is up 4 per cent versus roughly 7 per cent gains for both the mid and small-cap indices.
“If we are getting back on a growth track, it is less essential to own small and mid-cap stocks because you can get [growth] in large-caps,” Mr Colas said.
Money flows for exchange traded funds support the idea that large-caps are getting more love as 2016 winds down.
ETFs focusing on large-cap stocks took in more than $6bn in October while investors put $1bn into small and micro cap ETFs and pulled money out of mid-cap ETFs, according to XTF.com.
Coming into earnings season for the third quarter, expectations were for a decline of more than 2 per cent year over year, but with 58 per cent of the index having reported, a blended rate of reported and expected earnings shows a rise of 1.6 per cent, according to FactSet. If the rest of the earnings season goes well, it would snap a five-quarter streak of shrinking profits one quarter ahead of Wall Street’s expectations.
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