5 Green Weeks in A Row. Now What?

The market has been focusing a lot on the Federal Reserve’s interest-rate cut, job-market data, China stimulus, oil prices, and other macroeconomic news for the past month or so. But it’s now back to basics for stock pickers.

Earnings will take center stage in the coming week. UnitedHealth (UNH: +0.06%), Johnson & Johnson (JNJ: +0.59%), Bank of America (BAC: +4.95%), Goldman Sachs (GS: +2.50%), ASML (ASML: +0.81%), Taiwan Semiconductor Manufacturing, Morgan Stanley, Procter & Gamble, Netflix, and American Express are among the many blue-chip companies set to report their latest results. Whew!

JPMorgan Chase and other big banks kicked off earnings season this past week with solid results. Overall numbers for U.S. businesses should be OK in the third quarter, with analysts forecasting 4% growth in profits from a year ago for the S&P 500 index. But as always, investors will be paying more attention to corporate guidance. Wall Street is currently expecting a much rosier fourth quarter, with expectations of a 14.6% increase and double-digit growth next year.

“The thing that has been missing from the broader market is earnings growth,” says Craig Sterling, head of U.S. equity research at Amundi U.S. But with that finally about to change, Sterling says his firm is now underweight tech and prefers more cyclical sectors like financials and materials.

So, it’s probably a good idea for investors to overlook the considerable amount of noise in the market and focus on these strong fundamentals.

“You’ve got to stay the course and avoid being emotionally pushed around,” says Todd Walsh, CEO and chief technical analyst with Alpha Cubed Investments. He argues that the current market volatility is merely a healthy rotation, with investors looking for options beyond the Magnificent Seven, particularly in value stocks that also offer healthy levels of income, a group he calls the market’s “North Star.”

To that end, the SPDR S&P Dividend exchange-traded fund was up more than 10% over the past three months while the Nasdaq was down 2% over the same time frame. Walsh owns a diverse group of stocks sporting solid yields, including military contractors Lockheed Martin and RTX, American Tower, utility NextEra Energy, data center owner Digital Realty Trust, and Verizon Communications.

Others also think it’s time to lighten up on, if not necessarily abandon, tech stocks, given how well they’ve done. Despite the recent pullback, the Roundhill Magnificent Seven ETF is still up more than 40% in 2024. “There are concerns around crowded trades,” says Erik Knutzen, co-chief investment officer of multi-asset strategies at Neuberger Berman. His advice? “Reduce exposure in big cap tech, but there is a reason those companies have the ‘magnificent’ moniker. You don’t want to be absent from that group,” Knutzen says.

The days are getting shorter, and that can mean only one thing—it’s tax-loss selling season. And that goes for dividend investors too.

The concept is simple—the tax code allows investors to take losses in losing stocks to offset gains in winners, reducing the overall tax burden and taking some of the sting out of picking money losers. BofA Securities strategist Savita Subramanian notes that tax-loss selling really took off after the passage of the Tax Reform Act of 1986, which set an Oct. 31 deadline for mutual funds to realize capital gains. She found that since 1986, stocks down more than 10% for the year through the end of September underperformed the market over the following month. That means “brace for Red October,” she says.

That goes for dividend stocks as well. Subramanian notes that 10 dividend-paying stocks are flashing warning signs: CVS Health (CVS: -0.33%), fertilizer maker Mosaic, Dollar General, Estée Lauder, oil services players SLB (formerly Schlumberger) and Halliburton, chemical maker Celanese (CE: +0.99%), oil explorer Occidental Petroleum, medical device maker Zimmer Biomet, and health insurer Humana. Though these 10 stocks yield an attractive 2.4% on average, they are down over 20% year to date on average through Wednesday’s trading.

Yes, underperformance in one period can help lead to outperformance in the next. Wall Street, though, doesn’t think that’s too likely. The average Buy-rating ratio for the shares is about 45%, below the 55% average for stocks in the S&P 500 index. Yet Halliburton and SLB—with Buy ratings from 86% and 94% of analysts covering those two companies—look attractive for income investors. They yield about 2.2% and 2.5%, respectively, and pay out about 25% of net income as dividends, a safe level.

Other dividend-paying stocks fit Subramanian’s criteria, including seven Dividend Aristocrats—companies that have raised dividend payouts for at least 25 consecutive years but have struggled in 2024. They include asset manager Franklin Resources, lithium miner Albemarle (ALB: -0.91%), paint maker PPG Industries, steel maker Nucor, alcohol maker Brown-Forman (BF.B: +1.79%), corn and soy processing giant Archer Daniels Midland, and drug company West Pharmaceutical Services. These stocks yield an attractive 2.5% on average but were down about 20% year to date on average through Wednesday.

All Aristocrats boast impressive records of cash generation and capital return to shareholders. But Wall Street isn’t too high on this group either. The average Buy-rating ratio is about 40%. Only West Pharmaceutical and Nucor have above-average Buy-rating ratios—just 58% for West Pharma and 56% for Nucor. They yield about 0.3% and 1.5%, respectively, and pay out less than 20% of net income as dividends.

Two more non-Aristocrat dividend payers that have had a tough 2024, but which Wall Street supports, are healthcare company Perrigo and semiconductor maker Microchip Technology. Perrigo was down about 24% year to date through Wednesday. Microchip stock was off 13%. They pay out close to 70% of net income as dividends, a little higher than we’d like, but yield 4.5% and 2.3%, respectively.

Investors could consider buying the six dividend-paying stocks Wall Street favors noted above after a tax-loss-harvesting dip. Just remember, you must wait 30 days before buying back a stock you sold for losses or you’d be in violation of the “wash sale” rule and prohibited from deducting losses.

Nor can you buy something essentially equivalent to owning the stock, such as options contracts that produce stocklike returns. The Internal Revenue Service looks at the 61 days starting 30 days before a sale to check if any “substantially identical stock or securities” had been acquired, says accounting expert Robert Willens.

But who knows? Maybe well-timed purchases of solid dividend-paying stocks will mean no tax-loss selling in 2025.

Election Day finally is less than a month away, and the highly contentious campaign has taken a toll on many of us. Even worse, the outcome may not be decided by Nov. 5, as legal battles over the vote could extend well beyond.

Not only is this election weighing on Americans’ psyches, it may also weigh on the economy, at least in the short run. Businesses understandably will be apt to defer decisions about expanding or hiring when they don’t know what tax and regulatory regimes they will face depending on who is elected. And academic research finds that tendency is most pronounced the more contentious and uncertain the election is, which should come as no surprise.

The negative impact typically dissipates once a contest is decided. Until then, however, the economic data might have a less rosy hue, which might be exacerbated by other factors, such as hurricanes, strikes, and the like. Policymakers and investors should look past this stuff.

Election uncertainty has been a recurrent theme of various surveys of business sentiment, says Don Rissmiller, chief economist of Strategas Group. One of the most dramatic signs comes in the Uncertainty Index from the survey of small businesses by the National Federation of Independent Business (see nearby chart). This gauge is even higher than the peak seen in 2020 during the COVID-19 epidemic, he noted in an interview, when businesses and schools were still shuttered and a vaccine hadn’t yet been developed.

Highly unconfident The election appears to be weighing on smaller firms' outlooks even more than the COVID-19 pandemic did. NFIB Small Business Uncertainty Index Source: Bloomberg.

Companies say they are pausing capital spending and hiring ahead of the U.S. election, says Chris Williamson, chief business economist at S&P Global Market Intelligence. Its most recent Purchasing Managers Index for September found lots of uncertainty among U.S. manufacturers about the presidential election, what policy will look like, and what the general business environment will be after the vote. That, in turn, has led to a pullback in hiring, he said on a webinar discussing the latest PMI data.

Similar signs are evident in surveys such as those conducted by the Institute for Supply Management and the regional Federal Reserve district banks, Rissmiller says. He highlighted comments from the Dallas Fed Manufacturing Survey, noting concern among some respondents from this deep-red region about a possible Democratic victory. “The outlook is totally controlled by the November election,” said one manufacturer of transportation equipment in the survey.

It is reasonable for firms to pause capital expenditures and outlays for big-ticket items, Rissmiller observes. That has been the history ahead of elections. What is different is the contentiousness and closeness of this year’s contests. Add to that the potential for the outcomes not to be decided shortly after Nov. 5, with the possibility of legal challenges to the vote. Something like 2000’s Bush/Gore contest, which ended up being decided by the Supreme Court that December, would be the worst possible outcome, he added.

Then there’s the ever-lengthening list of policy proposals that are more about campaigning than a coherent fiscal plan, Rissmiller says. Former President Donald Trump floated this past week the notion of making automobile loans tax-deductible, similarly to home mortgages, along with tax breaks for U.S. citizens living abroad. That’s on top of other goodies he has offered on the campaign trail, including exempting tips from taxes, an idea glommed onto by his opponent in the presidential race, Vice President Kamala Harris.

What isn’t addressed, says Rissmiller, is that the current tax code expires at the end of 2025, when provisions of the Tax Cuts and Jobs Act of 2017 revert to the previous law. Congress is likely to be divided next year, with odds favoring Republicans retaking the Senate while Democrats could recapture the House of Representatives. That will complicate replacing the TCJA regardless of who wins the White House.

Neither party is offering any plan to reduce the present fiscal deficit, which ran over 6% of gross domestic product in the latest fiscal year, a gap once unheard of except in wartime or recessions. Moreover, the nonpartisan Committee for a Responsible Federal Budget estimated this past week that the Harris tax and spending proposals would boost the nation’s debt by $3.5 trillion through 2035, while Trump’s plan would balloon it by $7.5 trillion.

At the same time, economic data have been distorted by a confluence of temporary factors. For instance, new claims for unemployment insurance jumped in the week ended Oct. 5 to 258,000, the highest in over a year, from 225,000 in the preceding week. Much of the surge could be explained by the effects of Hurricane Helene and the strike against Boeing. No doubt Hurricane Milton will boost jobless claims in coming weeks.

So far, signs of hesitancy on the part of businesses ahead of the election haven’t shown up in the markets, notably stocks, with the S&P 500 (SPX: +0.61%) closing out this past week at another record. If anything, the bond market sees the opposite of impending weakness, with the 10-year Treasury yield up a significant 46 basis points (hundredths of a percentage point), at 4.08% on Friday, from its mid-September low. Additionally, spreads are tight in the investment-grade and high-yield corporate bond markets.

The recent higher-than-expected readings on September employment suggest the Fed is more likely to trim its federal-funds target rate by 25 basis points in November and December after last month’s supersize 50-basis-point cut. Indeed, minutes of the September policy meeting suggest there was vigorous debate on the size of the move.

But the weather and strike distortions may make for a weak October employment report, which will generate little economic signal but a lot of political noise as it will be released on Friday, Nov. 1, just days ahead of the following Tuesday’s vote. While it is likely policymakers and markets will look past all of this, owners of businesses will be apt to wait on making key spending decisions until the politics and policies become clearer.

Factors this week I’m focusing on.

1. The first full week of third-quarter earnings
2. October month overhang
3. Financial Stocks
4. IWM
5. NVIDIA

DATA: Barron’s print edition page 27 10/14/24 Market Week Paul R. La Monica

Paragraph: one, two & three ChatGPT AI online 10/12/24 Last Weeks Market Recap

Paragraph: four-nine Barron’s online edition page 27 10/14/24 the Stock Market Enters Another Earnings Season. Paul R. La Monica

Paragraph: ten- twenty-one Barron’s print edition page 20 10/14/24 6 Dividend

Stocks to Buy Al Root

Paragraph: twenty-two – end Barron’s print edition 10/14/24 page 26 Election Uncertainty Randall W. Forsyth 10/14/24
Paragraph: last what I’m looking at Richie Naso

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