a shifting market

Happy Halloween!!

In addition to its religious significance–and the general opportunity to gorge on candy–Halloween is important to investors in particular because it marks the end of the fiscal year for most mutual funds. That’s important because funds typically do their yearly tax and distribution planning (both involving net selling) during the six or eight weeks running up to today. That’s usually followed by a rebound that lasts for a month or so.

This year the S&P 500 peaked in mid-August and fell pretty continually until two weeks ago. The depth of the decline–a loss of 17%–and the length of the selling period–two months–both suggest that while seasonal selling might have been a factor in the losses, it’s not the whole story.

If so, it’s not clear whether we’ll see the typical rally into yearend.

My sense is that we may also be seeing the start of an important shift in investor sentiment away from large-scale macro factors–interest rates, the peaking of government pandemic relief spending, the healing of supply chains–to more company- and industry-specific factors. We can already see this, I think, in the widely differing market response to disappointing earnings being reported in the September-quarter reporting period. Results from the autos, for example, are being shrugged off, while those from, say, META or AMZN are triggering substantial selling. With the possible exception of META, my sense is that the market is trying to assess the extent of companies’ excess inventories and the skill/lack of that they are displaying as they attempt to minimize their negative effect on future results.

Oddly, and maybe because it’s happening and I’m not seeing it, the strength of the dollar–meaning the weakness of foreign currency-denominated results–hasn’t made much difference to Wall Street. It’s more an evaluation of good management vs. not so much. Still, this seems to me to be a more sophisticated approach to stock selection than we’ve seen over the past couple of years.

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