The S&P 500 advanced 1.1% on Wednesday, securing a second straight day of gains to end a bruising October with a monthly loss of 6.9%. Mega-cap technology stocks were in control from the get-go, following Facebook (FB 151.79, +5.57, +3.8%) releasing its third quarter earnings report the previous evening.
The tech-sensitive Nasdaq Composite surged 2.0%, reducing its monthly loss to 9.2%, while the Dow Jones Industrial Average gained 1.0% to reduce its monthly loss to 5.1%. Small caps underperformed, with the Russell 2000 adding 0.3% to bring its monthly loss to 10.9%.
Facebook's "good enough" earnings report tempered negativity surrounding the stock, and its positive price action proved infectious for the other FANG stocks. Facebook beat earnings expectations and increased its revenue growth outlook, easing nerves after the social network warned of growth-deceleration last quarter. Of note, Facebook is still down 30.2% from its July 25 record close.
Alphabet (GOOG 1076.77, +40.56, +3.9%) and Netflix (NFLX 301.78, +15.97, +5.6%) joined Facebook with noteworthy gains on Wednesday, underpinning the strength in the communication services sector (+2.1%). Likewise, Apple (AAPL 218.86, +5.56, +2.6%) and Amazon (AMZN 1598.01, +67.59, +4.4%), respectively, provided strong support for the outperforming information technology (+2.4%) and consumer discretionary (+1.6%) sectors.
Also, the rate-sensitive and heavily-weighted financials sector outperformed the broader market with a gain of 1.4%. Top-weighted components JPMorgan Chase (JPM 109.02, +2.29) and Bank of America (BAC 27.50, +0.71) provided strong support with respective gains of 2.2% and 2.7%. Financials benefited from a slight steepening of the yield curve, with the 2-yr yield increasing four basis points to 2.88% and the 10-yr yield rising five basis points to 3.16%.
Conversely, underperforming sectors on Wednesday included the defensive-oriented consumer staples (-0.9%), utilities (-1.2%), and real estate (-1.4%) groups. These spaces were the only S&P sectors to finish in negative territory. The consumer staples and utilities sectors, however, were the only sectors to end October with gains, up 2.1% and 1.9%, respectively.
In other earnings, General Motors (GM 36.59, +3.05, +9.1%), eBay (EBAY 29.03, +1.61, +5.9%), T-Mobile US (TMUS 68.55, +4.63, +7.2%), and Automatic Data (ADP 144.08, +6.82, +5.0%) all sported healthy gains after reporting better-than-expected results. On the other hand, Kellogg (K 65.48, -6.38) lost 8.9% after missing bottom line estimates and lowering its adjusted earnings outlook.
Also contributing to the rally was end-of-the-month activity from fund managers and possibly some short-covering activity. There was an underlying expectation for fund managers to boost their portfolio equity weightings following this month's sell-off. Concurrently, it stands to reason that short sellers were covering their positions, as the market enters what is historically a favorable seasonal period.
Separately, WTI crude extended its recent decline, losing 1.3% to $65.31/bbl, reaching its lowest level since August. The U.S. Energy Information Administration reported a weekly crude oil inventory build of 3.2 million barrels, marking the sixth straight week inventories have risen.
International equity markets finished Wednesday on a higher note. In Asia, Japan's Nikkei gained 2.1% after the Bank of Japan made no changes to its policy stance, and China's Shanghai Composite added 1.4% to notch its second consecutive gain. Meanwhile, the Euro Stoxx 50 tallied a 1.6% gain with France's CAC (+2.3%) leading the advance.
Reviewing Wednesday's batch of economic data, which included the October ADP Employment Change report, the third quarter Employment Cost Index, and the weekly MBA Mortgage Applications Index:
- The third quarter employment cost index increased 0.8% (Briefing.com consensus +0.7) versus 0.6% in the second quarter. Wages and salaries, which comprise about 70% of compensation costs, increased 0.9%, while benefit costs jumped 0.4%.
- The key takeaway from the report is that it corroborates a trend of rising compensation costs for civilian workers that have been discussed by employers and which have kept the Federal Reserve on a tightening path.
- The ADP National Employment Report showed an increase of 227,000 in October (Briefing.com consensus 180,000), and the September reading was revised to 218,000 (from 230,000).
- The weekly Mortgage Applications Index showed a decrease of 2.5% versus an increase of 4.9% in the prior week.
Looking ahead, investors will receive a flurry of economic data on Thursday, including the October ISM Manufacturing Index, the preliminary Q3 Nonfarm Productivity and Unit Labor Costs report, the weekly Initial and Continuing Claims report, September Construction Spending, and Auto and Truck Sales for October.
- Nasdaq Composite +5.8% YTD
- Dow Jones Industrial Average +1.6% YTD
- S&P 500 +1.4% YTD
- Russell 2000 -1.6% YTD