Markets are approaching a potentially important seasonal turning point, but the headline picture masks considerable weakness among smaller stocks.
In the latest Markets in Motion, StoneCastle Investment Management President Bruce Campbell points to a widening divide by market capitalization. One measure shows 56.7 per cent of smaller stocks sitting at least 20 per cent below their 52-week highs, compared with 21 per cent among larger stocks.
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Sector trends are also beginning to shift. Technology is reaccelerating, financials have weakened and utilities have faced significant pressure. Looking beneath the headline utility index, however, Campbell sees several individual names beginning to turn higher on relative rotation measures.
That could tie into changing expectations for US interest rates. At the end of September, markets were pricing in roughly 1.5 additional rate hikes before year-end. Following the latest payroll report, that has fallen to around one, raising the possibility that the rate-hiking cycle is moving closer to its conclusion.
Oil could provide another piece of the puzzle. Historical seasonality points to a weaker period for crude from late October through the end of the year. If oil prices decline, Campbell suggests the resulting reduction in inflationary pressure could reinforce changing rate expectations.
The broader seasonal backdrop could also become more supportive. Year two of the US presidential cycle has historically weakened heading into October before improving, while year three has traditionally been the strongest year of the four-year cycle. S&P 500 seasonality also points towards a stronger period ahead.
None of those patterns guarantees the market has received an “all clear,” but together they suggest investors may be approaching a more favourable part of the calendar.
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