Trading the Halloween Effect

Markets were directionless in morning trade as traders ponder what the Federal Reserve might say tomorrow and monitor upcoming jobs data, headlines from the Middle East, and underwhelming earnings reports. We highlight some spooky academic research on All Hallows' Eve (the evening before All Hallows' Day).

Bottom line: Risk-on (if you dare!)

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TODAY’S MAJOR NEWS

Trading the Halloween Effect

Here’s a spooky thought for investors: the Halloween Effect sees global stocks outperform between November and April. Equity market returns for the six months following Halloween averaged 8.5%. It’s opposite to the famous adage that prompts "sell in May and then walk away,” thanks to poor returns between May and October. Vacations, the Christmas buying season, and spring optimism all contribute.

Stocks traded 4% better in November through April compared to the summer months, according to ‘The Halloween Indicator,’ a 2018 study of 65 developed and emerging markets over 300 years by Ben Jacobsen and Cherry Y. Zhang. “We find an overall historical market risk premium of 4% (for  November-April) … summer returns (May-October) are significantly lower than the risk-free rate by 1.1% … This finding does not only challenge the notion of market efficiency but also seem to defy the positive risk-return trade-off,” the authors conclude.

Employment costs rise, bad news for inflation

Federal Reserve members will likely highlight the stickiness of inflation in what they call the “super-core” sector of the economy, primarily tied to wage inflation. Today’s employment cost index, a measure of wage inflation, made this point and is an ominous sign for early rate reductions. The employment cost index rose 1.1% quarter-on-quarter and 4.3% year-on-year in the third quarter, echoing the second quarter.

Consumer pessimism doesn't restrain their spending

The Conference Board’s headline on today’s consumer confidence neatly summarizes the predicament of the US economy: “Consumers Remain Pessimistic About the Future — Even as They Continued to Spend.” The present situation index and the expectations index saw modest declines this month. The expectations index remains below 80, historically an indicator of a coming recession.  Consumers continue to have a great deal more confidence in the current environment than six months hence.

• The consumer confidence index slipped lower to 102.6 in October, above the expected 100.0, and down from 104.3 in September
• The present situation index fell to 143.1 this month, down from 146.2 last month
• The expectations index that measures consumer confidence six months out fell to 75.6 this month, down slightly from 76.4 last month

Home prices hit all-time high

• The S&P CoreLogic Case-Shiller National Home Price Index hit an all-time high in August, rising 0.9% month-on-month and 2.6% on a seasonally adjusted basis
• The index tracking existing home prices in the 20 largest US cities also gained 1.0% in August versus July and 2.2% year-on-year

China’s Purchasing Manager’s Index (PMI) falls

Today’s PMI data casts doubts on China’s recovery despite some recent positive signs. An unexpected decline in the manufacturing PMI suggested the economic recovery remained vulnerable as China has been grappling with the crisis in the property sector and shrinking exports.

• China’s official manufacturing PMI surprisingly contracted to 49.5, rather than the forecast expansion, down from 50.2 in September
• The non-manufacturing PMI was at 50.6 in October, missing market expectations of 51.8, the lowest since March, and down from 51.7 in September
• The new order index dropped to 49.5, from 50.5 a month earlier, while the new orders for export fell steeper to 46.8 from 47.8 in September
• A number below 50 signifies contraction, while a number above 50 indicates growth

TODAY’S MAJOR MARKETS

Russell 2000 rallies in listless markets

• The Russell 2000 was up 0.7% in morning trade, with the S&P 500 and Nasdaq trailing, up just 0.2% and 0.1%, respectively
• Foreign equity markets were mixed, with a 0.5% rally in the Nikkei 225, a 0.2% rise in the DAX, and a 0.2% fall in the FTSE 100
• The VIX, Wall Street’s fear index, fell back to 19.1

Dollar rallies, bond yields unchanged

• 2- and 10-year yields held steady at 5.08% and 4.86%
• The dollar index was up 0.7% to 106.8
• Versus the dollar, the Yen fell 1.7%, the Euro fell 0.6%, and Sterling was down 0.3%

Oil slips further

• Crude oil prices fell 0.3% to $82.5 per barrel
• Spot gold prices fell 0.3% to 2,000 per ounce, while Silver fell 1.4% to $23.1 per ounce
• Grain and oilseed markets are mixed in relatively quiet trade

Analysis by Arlan Suderman, Chief Commodities Economist: Arlan.Suderman@StoneX.com

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com