Key Takeaways

Geopolitics, crude, Treasury yields all pose uncertain picture for stocks as November begins

Yet another government shutdown possibility could drive more cautious trading by mid-month

Earnings season marches on in November, highlighted by Apple, Nvidia, and retail firms

At the start of October, Wall Street and the economy faced heightened uncertainty. November looms with many of the same questions unanswered and fresh geopolitical tension in the mix.

October’s initial gains dissipated as investors grew concerned amid climbing crude oil prices, 16-year highs in Treasury yields, and new signs of sticky U.S. inflation. Sentiment took another blow when war flared in the Middle East, but the other concerns matched those that sent stocks down in both August and September.

Back home, instability in Washington, D.C. that nearly led to a government shutdown in September grew more dramatic in October with the absence of a House speaker. Congress operates under a continuing resolution that keeps the government open until November 17. The chance of a mid-November shutdown poses possible risk and could keep trading cautious.

November begins with a Federal Reserve rate decision the very first day of the month, but futures trading builds in little chance of a rate hike. Instead, attention turns toward the mid-December Federal Open Market Committee (FOMC) meeting, where there’s now a better chance of another 25-basis-point rate increase, according to CME Fed funds futures.

Third-quarter earnings season enters November at peak volume before slowing slightly later in the month. Investors are on the edge wondering if this will be the first quarter in a year to show annual earnings per share growth for S&P 500® companies.

Fed meeting rings November’s opening bell

There’s so much on the plate entering November it’s hard to even know where to start. Because the Fed decision is November 1 and the 10-year Treasury note (TNX) yield recently moved above 5% for the first time since 2007; maybe monetary policy is the place to begin.

The Fed left rates on pause in September at a 22-year high range between 5.25% and 5.5%. It also projected another rate hike this year, but odds of that happening in November faded to practically zero by late October as the Middle East crisis flared. There’s a chance the Fed might take things slow to see if the war expands beyond Israel and Gaza; something that would likely cause crude oil to increase even further from recent one-year highs above $90 per barrel for WTI Crude Oil futures (/CL). The Fed’s dual mandate includes maximum employment, and an oil shock would pose possible recession risk.

There’s also a growing sense, based on recent Fed speaker comments, that higher Treasury yields may be doing some of the Fed’s job in tightening conditions. Inflation has been trending lower all year, though the September data looked slightly warmer than expected. There’s a sense that as long as inflation continues to moderate, the Fed can bide its time on rates while keeping its threat to jump back in with a hike if inflation should surge.

The inflation indicator followed most closely by Fed policymakers is Personal Consumption Expenditures (PCE) prices, and the September report is scheduled to come out tomorrow. Though it’s unlikely even a surprisingly hot PCE report would influence the Fed’s November 1 rate decision so close to the announcement, it could play into the Fed’s plans for December. So could the November 3 U.S. Nonfarm Payrolls report for October, which follows unexpectedly strong September jobs growth of 336,000.

Inflation, jobs, retail sales, Gross Domestic Product (GDP), and some housing data all proved more resilient lately than many had expected this late in a rate-hike cycle, putting pressure on the Fed to show progress in slowing the economy. That means it’s possible the Fed might be on the verge of a “hawkish pause” on November 1 for the second straight meeting, indicating that what the central bank says about the future tells investors more than the actual decision. As Fed Chairman Jerome Powell said in late October, economic conditions aren’t necessarily tight enough based on what Fed policymakers see in the data, and inflation isn’t slowing as much as the Fed wants.

Washington, geopolitics on speed dial

As of late October, there’s little sign that Congress is well positioned to address many challenges between now and the anticipated November 17 shutdown date. A shutdown will likely clip economic growth if it goes on for more than a few days, and it could pose a special challenge for certain companies like defense contractors that rely on Washington for much of their business.

A shutdown might also slam the door on important economic data, though most of October’s key numbers will be out before November 17. Even so, Wall Street got rattled ahead of the possible shutdown in September, and a repeat of that won’t be surprising if Washington again goes down to the wire. Lack of a speaker intensifies the tension.

As Washington takes speaker votes, Wall Street faces overseas worries as well. The Russia-Ukraine war shows no sign of ending, and the Middle East situation remains volatile. Energy and defense companies got an initial boost from the fighting in Israel, but the rest of the market struggled in the first days of the conflict.

Airlines, resorts, and other companies with exposure to the region saw their shares dragged down, while crude oil prices rebounded after sinking in early October.

Speaking of tension, the United Auto Workers (UAW) strike against the top three U.S. automakers is now more than a month old and is costing the companies millions of dollars a day, industry analysts said. 

Earnings roll on in new month

Retail sales were resilient in September, according to government data, but November marks the start of the holiday shopping season. Can retail companies count on people to come out in large numbers for Black Friday on November 24? That’s a question that companies like Walmart (WMT), Target (TGT), and Best Buy (BBY) might get from analysts when they report earnings in November.

The retail sector’s key earnings reports in mid-November are bookended by two mega-cap tech companies, Apple (AAPL) and Nvidia (NVDA), which are expected to report November 2 and November 21, respectively, according to Earnings Whispers. NVDA shares stumbled recently amid U.S. chip market trade tensions with China but remain up sharply for the year on a boost from artificial intelligence demand.

AAPL, meanwhile, is on a stretch of falling year-over-year revenue. Both its iPhones and iPads struggled the last time AAPL reported, so investors will want to check whether the introduction of the most recent iPhone sparked any improvement. Another question is whether AAPL’s high-performing services business can continue to bolster earnings. China is another concern following the introduction of a competing phone from a domestic manufacturer.

Analysts expect overall Q3 S&P 500 earnings to rise about 0.4% from a year earlier before even stronger gains in Q4 and next year, research firm FactSet said. Typically, earnings outpace analysts’ preseason estimates, but a strong early start to earnings season from the financials sector started to fizzle a bit in the second full week of earnings. November will ultimately tell the tale of corporate health, and investors should remember to look beyond the scorecard of who “beats” and who “misses” analysts’ estimates.

“The emphasis throughout reporting season should be less on traditional metrics of beat rate and the percentage by which companies are beating; instead, it should be on longer-term macro messages, such as labor as input cost, profit margin protection, pricing power, and the impact of higher yields,” said Liz Ann Sonders, chief investment strategist at Schwab.

November also could tell us a lot more about the path of crude oil prices, which continue to reflect supply tightness caused by OPEC’s production trims. OPEC members and their allies kept production unchanged at their early October meeting, but if the Middle East crisis spreads, they might come under pressure to do more. And any spreading crisis there likely would involve Iran, which could see its exports threatened.

Jobs data kick off November numbers watch

Major data highlights in November include the monthly Job Openings and Labor Turnover survey (JOLTS) and the November 3 jobs report. The August JOLTS report released in early October showed a surprising jump in openings and appeared to spook investors who had thought the jobs market was getting looser. Instead, there’s an excess of openings, which has some analysts worried wage pressure could continue, potentially opening the door to more inflation. The September JOLTS report is due November 1.

Before that, we’ll learn if October ends up being the third month in a row of losses for the S&P 500 (SPX). If that happens, it’ll be the first time since January through March of 2020. The path of stocks as October ends and November begins will likely continue to reflect the performance of fixed income, with yields calling the shots.

“Ultimately, the path of rates will likely be determined by monetary policy and the economy,” said Kevin Gordon, senior investment strategist at Schwab.

Happy trading,

Alex

Helpful educational content and programming

Check out all our upcoming webcasts or watch any of our hundreds of archived videos, covering everything from market commentary to portfolio planning basics to active trading strategies. You can also deepen your investing know-how with our free online immersive courses or by attending one of our live events. No matter your experience level, there’s something for everybody.