Stocks may have finally bottomed this week, or the very least they are enjoying a solid bounce following a period of heavy selling. Short interest grew very high on the Russell 2000 Index and as a result of short covering, the index put together a much needed win streak despite selling in the large cap indexes. The Russell finished the week gaining an impressive 2.75 percent.
Oil prices also rallied on Thursday and into Friday. The crude oil market has acted as the weak link, pulling markets lower with its relentless selling. Once oil rebounded though, stocks quickly followed. Aside from oil, Europe is the other big concern. Green bond yields jumped from a 6.6 percent to more than 9 percent this week, a sign that the next bear market could bring real trouble for Europe. By Friday though, European shares were also enjoying a strong rebound.
With volatility on Wall Street grabbing the headlines and sending shares lower, investors may have missed some excellent earnings reports. Profits and revenues were up strongly at Intel (INTC), while General Electric (GE) delivered an earnings beat and a revenue increase over last year. The healthcare sector got off on the right food as both Johnson & Johnson (JNJ) and UnitedHealth (UNH) beat earnings estimates. Healthcare continues to perform well during this period of nervousness.
Many companies in the financial sector reported as well. J.P. Morgan (JPM), Bank of America (BAC), Citigroup (C) and Wells Fargo (WFC) all beat earnings expectations. The investment banks performed even better since they benefit from greater stock market volatility because it leads to more trading. Both Goldman Sachs (GS) and Morgan Stanley (MS) beat their estimates by a considerable margin. The financial sector has been one of the stronger sectors this month relative to the performance of the S&P 500 Index. These earnings reports could help the sector maintain that edge on the way up.
Economic data was mixed this week: retail sales in September were down, but consumer sentiment is up in October. Investors were more focused on comments by the President of the St. Louis Fed, James Bullard, stating that low inflation numbers may require an extension of quantitative easing through December. There doesn’t appear to be any widespread support for that opinion among Fed officials at this time. The Fed meets on October 28-29 and has clearly signaled it intends to end the easing program.
The recent sell-off in stocks has created some jitters, but even counting from S&P 500 Index’s intraday high on September 19 to the intraday low on October 15, the decline did not reach 10 percent. Historically, a 10 percent drop comes about every 18 months in the market and this correction was overdue. Fear is high because stocks haven’t seen a broad sustained drop since 2011, more than 3 years ago. Thus far, this dip has been well within a normal bull market cycle.