Wall Street is officially “quiet” as we head into October.
Looking at my historical data, analyst activity is often picking up in the second half of September as Wall Street is often preparing for the fourth quarter of the year.
For those that may not be aware, the fourth quarter of the year is one of the most seasonally strong periods.
From October through December, the S&P 500 averages out as the best, and most consistent, monthly returns for the S&P 500. Last year, the benchmark index made a strong 13.5% rally through the final quarter.
That move was made after some volatility took stocks lower in October, often referred to as the “Comeback Kid Month” since the market often bottoms in October.
Nonetheless, all seems quiet from Wall Street as we prepare to move into October, what gives?
The Fed just put a great final quarter of the year into play.
Earlier this month they lowered rates and suggested that we’re set to see more cuts by the end of the year.
Earnings from last quarter were mixed but remain positive.
The jobs market has showed some signs of softening, but nothing too grim.
It feels like the perfect setup for a year-end rally, except one thing stands in the way, the General Elections on November 5.
Could that be why we’re seeing fewer upgrades and downgrades from Wall Street?
This year, Wall Street started drawing-up their year-end play in January.
Analysts assumed that the Fed would have to act at some point to lower rates and they used that as the foundation for their gameplan, not the elections.
The result? Wall Street was much busier getting ready for the year-end rally in May and June when the Fed started getting closer to cutting rates.
As a result, there was a larger than usual amount of trading volume working its way through the market then as institutions and large fund traders were executing their plan.
And the Fed Played right into their play.
That’s what the pros were looking for with their playbook this year.
Normally we would see the high volatility/high payout sectors get the attention from Wall Street, not this year.
Analysts and institutional investors have been going after lower volatility sectors that would benefit from the Fed’s lowering of rates.
And it’s worked so far.
Historically, the year-end trade included large cap technology, biotechnology and the financials. Those sectors are lagging the market right now.
Think slower here. Think Utilities (XLU), Real Estate (IYR), Homebuilders (XHB), and Regional Banks (KRE).
The table below shows performance of the major ETFs for the third quarter.
These are the sectors that the institutions have been tilting their investments towards. This is the year-end plan.
At the end of the year, they’ll head back to the conference rooms to decide if a change will be made, but for now these are the sectors that will be favored through year-end.
Note the common denominator of each sector… The Fed and lower rates.
This sector is trading almost 30% higher than it was at the beginning of the quarter (not year).
Investors have been running into the homebuilding stocks because of the Fed lowering interest rates and the lack of inventory.
I’ve pointed out more than a few times that the inventory problem will begin to be solved as rates come down and existing owners turn more willing to sell.
For that reason, expect the Homebuilders to start slowing a bit as we enter 2025, but for now it’s a favorite.
Of all the sectors in the year-end plan, this sector as the legs to run the furthest.
Everyone is just waking-up to the fact that our energy needs are going through the roof as a result of AI. Just last week we hear of the re-opening of one of the reactors at the Three Mile Island facility as part of a deal with Microsoft (MSFT) to power their data centers.
This is not a problem that has a quick solution and the utility companies will benefit over the long run.
The Fed has some influence on this trade as well as utility companies pay hefty dividends.
Real estate companies and REITs are benefitting from lower rates in two ways.
First, the lower rates are allowing many real estate companies to refinance their existing loans at lower rates.
One of the largest worries in the industry was that companies would have to refinance billions in loans at higher rates. That would have resulted in payments they couldn’t afford and thus a crash of the commercial real estate sector.
This fear is alleviated as rates go down. There will still be some troubles in the industry due to vacancies, but not as catastrophic as forecasted a year ago.
The regional banks are the epicenter of the lower rate world.
Regional banks have been struggling through the last two years as their main source of business – commercial and real estate loans – were affected by higher rates. In addition, they were forced to pay higher rates to depositors to keep their deposits on hand.
That was a business model that provided a hurricane force headwind for the regional banks.
Over the next six months, that headwind shifts to a tailwind as rates move lower.
Companies like Fifth Third Bancorp (FITB), KeyCorp (KEY), and PNC Financial Services (PNC) have seen upgrades to their stocks and increases in trading volume as investors move back into these critical names.
It’s as simple as buying any of the ETFs mentioned.
Expect to see some market volatility surrounding the upcoming elections on November 5, but that will stand true for every sector of the market.
On Wednesday, we’ll go through one of the top prospects from each of these sectors in a deeper dive on this “safety trade”
Also on Wednesday, an update on the Gold trade as the commodity maintains its rule over the market in these uncertain times.
