10-8-24: Positive Earnings Usually Deliver the Best October Surprises!

by Louis Navellier

October 8, 2024

October is a seasonally strong month, but history shows us that the month often starts slow and then picks up in the second half as third-quarter earnings announcements commence. As a result, I am expecting that the second half of October will be stronger than the first half. This is especially true in election years, as investors are on high alert for any “October surprise,” such as last Tuesday’s Iranian retaliatory missile attack on Israel. Iran launched about 200 ballistic missiles in an attack on Israel, but virtually all missiles were intercepted. Now, I would expect Israel to respond and possibly attack some key targets in Iran.

In the meantime, the U.S. has deployed a few thousand additional troops to the Middle East to protect U.S. citizens and protect Israel, if necessary. A wider conflict between Iran and Israel is becoming much more likely, and that prospect has pushed crude oil prices up, on fears of possible supply disruptions.

The good news is that, as the third-quarter earnings announcements begin to pour in, I expect that our fundamentally superior stocks will benefit from wave after wave of earnings surprises. By early November, we should know who the next President will be (provided we do not have a contested election again), as well as the content of Congress, and also whether (and by how much) the Fed will cut key interest rates during the week of the election. Consumer sentiment should then improve, since most of the major economic and political uncertainties will be removed. Then, as the holidays approach, consumers should be in a better mood. This is why our stocks typically benefit from an “early January effect,” since the advent of Thanksgiving traditionally launches the holiday season – the happiest time of year!

A Quick Rundown on Last Week’s Initial Economic “October Surprises”

We apparently dodged a very serious economic threat when most of our major national ports were only shut down for three days instead of three weeks. This strike, which stopped all the containers being shipped to dozens of major U.S. ports, could have potentially disrupted holiday sales. As Bryan Perry explained here last week, the media covered the union’s wage demands, but the Longshoreman’s union was clearly more worried about their job security and automation (AI) eliminating their jobs over time.

The Longshoreman strike was especially threatening to manufacturers, but shoppers know that bananas spoil rapidly, so fresh fruit was expected to be the first casualty of any prolonged Longshoreman’s strike.

As if the Longshoreman strike was not disruptive enough to worry the Kamala Harris presidential campaign team, the ISM manufacturing report, announced on Tuesday, was truly horrific. Specifically, the ISM manufacturing PMI remained at 47.2 in September. Any reading below 50 signals a contraction, so this marked the 23rd month that the ISM manufacturing index has been below 50, with only one month in which the index rose briefly rose above 50. The “new export orders” component of that index plunged to 45.3 in September, down from 48.6 in August. Only five of the 18 manufacturing industries that ISM surveyed reported any expansion in September, so the U.S. manufacturing recession stubbornly persists.

In contrast, the service economy is doing fine. On Thursday, ISM announced that its non-manufacturing (service) index rose to 54.9 in September, up sharply from 51.5 in August. This was the fastest pace that the ISM service index has expanded since February of 2023!  The most impressive components were business activity, reaching a robust 59.9 (up from 53.3 in August) and new orders, at 59.4 (up from 53 in August). Fully 12 of the 17 service industries reported an expansion in September, so the service sector is the primary catalyst behind U.S. GDP growth, which was revised to a 3.0% gain for the second quarter.

Friday’s non-farm payroll report said 254,000 new jobs were created in September, but there are some doubts and footnotes that we must add to that euphoric number. First, ADP reported on Wednesday that only 143,000 private payroll jobs were created in September. That was higher than economists’ consensus estimate of 125,000 jobs, but barely half of what the Labor Department reported to the nation on Friday.

One key to this discrepancy is that ADP reports on private sector payroll jobs, while the Friday jobs report comes from surveys, not actual payroll data, like ADP, and many of the Labor survey jobs in the last year were government jobs. The Friday BLS press release said that in the last 12 months an average 45,000 of the 203,000 new jobs gained each month were government jobs, representing 22% of all new jobs.

The U.S. Dollar Rallies on the Strong Jobs Report

The U.S. dollar was fairly strong in the first half of 2024, based on the relatively high return of the U.S. dollar vs. other currencies, but the dollar began to fall in July on anticipation of the Fed’s first rate cut. The U.S. Dollar Index (DXY) fell 4.8% in the third quarter, while gold rose 6.5% to set new highs, even while crude oil fell 16% during the same quarter, but those trends reversed in the first week of October.

In the first four days of October, the Dollar Index is up 1.8% and crude oil is up 9%, partly due to the Iran rocket attack on Israel and the anticipation that Israel will respond in some way. But the dollar’s biggest increase came after Friday’s strong jobs report, indicating that the Fed will likely cut key interest rates by only 25 basis points in November, not 50 bps. Also, Eurostat reported on Tuesday that consumer inflation in the euro-zone is now running at just 1.8% (annual rate) through September, down from a 2.2% annual pace in August. This is setting up the European Central Bank (ECB) for another key interest rate cut.

ECB President Christine Lagarde has hinted that another euro rate cut would likely be forthcoming, and the next ECB meeting is slated for October 17th. However, since the Bank of England has only cut key rates by 0.25%, the British pound has appreciated against the U.S. dollar and other currencies. In the last week, however, that trend has temporarily reversed, as the dollar has rallied in the first week of October.

In other news, the European Union (EU) officially voted last Friday to impose up to 45% tariffs on Chinese electric vehicles (EVs). The countries that have major automotive plants, like Germany, Hungary and Slovakia, voted against the Chinese EV tariffs. German manufacturers, like VW Group, are planning on importing Chinese EVs from Xpeng that will have a VW badge. Even with these new EU tariffs, it will still be more cost effective to import low-cost Chinese EVs than make them in many European countries.

Navellier & Associates does not own Volkswagen AG Unsponsored ADR (VWAGY) in managed accounts. Louis Navellier does not own Volkswagen AG Unsponsored ADR (VWAGY) personally.