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USA Today: October's Stock Gains May Mute Year-End 'Santa Rally'

USA Today: October's Stock Gains May Mute Year-End 'Santa Rally'
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By    |   Tuesday, 03 November 2015 12:20 PM

October’s stock rally may mean there’s less upside into the end of the year, according to historical analysis of prior trends.

The S&P 500 snapped back from its August correction by rising 8.3 percent last month for the biggest monthly gain in four years. During that time, public statements by central banks including the Federal Reserve, People’s Bank of China, Bank of Japan and European Central Bank helped to drive the rally.

But a strong October may portend a weaker November, reports Adam Shell of USA Today.

“Although November has been the Dow Jones industrial average’s second-best performing month the past 20 years (gaining an average 2.4 percent and finishing up 70 percent of the time), the market has posted slightly negative returns (-0.12 percent) in November after the S&P 500 gains 5 percent or more in October,” Shell writes, citing Bespoke Investment Group data since 1928.

“And the bigger the gain in October, the bigger the likelihood of underperformance the rest of the year,” Shell says, pointing to data from S&P Capital IQ.

When the market gains more than 7 percent in October, which has occurred five times since 1945, the S&P 500 gains only 1.9 percent in the final two months of the year and is up only 60 percent of the time, S&P data show.

Meanwhile, stocks are again showing signs of getting too expensive compared with their earnings.

The price-earnings ratio for the S&P 500 is close to a five-year high at 18.8 times, according to Bloomberg News. The ratio reached 18.9 times on July 20 and fell to 16.6 times on Aug. 25, when the index hit a year-to-date low.

Central banks are helping to drive investors into stocks, says Russ Koesterich, BlackRock Inc.’s global chief investment strategist.

“Investors are once again reacting, as if on cue, by buying risky assets,” he says in a report.

The Federal Reserve may raise interest rates next month for the first time since 2006, which may put a damper on U.S. stocks. But the Bank of Japan shows no similar restraint as it confronts slowing economic growth and low inflation.

“The actions of other central banks are likely to continue to bolster market valuations,” Koesterich says.

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October's stock rally may mean there's less upside into the end of the year, according to historical analysis of prior trends.
stocks, market, rally, Santa Claus
Tuesday, 03 November 2015 12:20 PM
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