S3-4: Q3 GDP Surprise, Bear Market Rally & A Deep Dive on How to Get Scholarships for College

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As October neared its close last week, markets rallied to post positive monthly returns for just the third time this year. Is it a bear market rally or have we seen the bottom and are we on our way to recovery? Behind the rally? We had a positive Q3 GDP surprise and a range of data points from Q3 earnings. After that, we will take a deep dive on how to find scholarships for college with scholarship expert and author, Jean O’Toole. While everyone else is waiting on the courts to decide on student loan forgiveness, let’s talk about something that you can control – how to get scholarships for college.

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A Bear Market Rally

For the week ending October 28th, the S&P 500 finished the week up 4.0%, with the index now up 8.8% for the month of October, reducing the year-to-date drawdown to -18.2%. Does this mean the bear market is over? Or is this just a bear market rally (a brief, but often large, upswing in the midst of a larger bear market)?

To determine that, we have to look at why the market rallied in October, and really mostly just the second half of October. Three major factors contributed to the October rally:

• A shift in focus to Q3 earnings season – earnings season for Q3, ended September 30th, is being released, and most companies are beating earnings… more on that in a moment
• Q3 GDP was released on Thursday – and surprise – it was up +2.6%, another positive headline that boosted the market… more on that to come too
• Third, interest rates have started to take a bit of a pause ahead of the November Fed meeting

Next week, the Fed has its regularly scheduled FOMC meeting, and recent press conferences have led many to believe we may see the last +75bps rate hike along with plans to start to moderate rate hikes going forward. And because the market prices in these expectations ahead of these actions, interest rates have started to moderate a bit, giving the market some relief from the downward pressure rate hikes have caused all year.

Also, increasing recession concerns are also giving rates a pause. In a recession, we typically see a decline in consumer demand which leads to a rise in unemployment as companies look to cut costs. This then leads to further loss of consumer demand. To stem that downward spiral, the Fed often will look to cut interest rates in order to boost demand and encourage businesses to hire again.

A few reminders here on bonds. First, as interest rates rise, it puts downward pressure on the stock market, and causes bond prices to fall as well. That’s the story behind both stock market and bond market performance year to date.

However, last week, we saw 10-year treasury rates fall from 4.23% on Monday down to 4.01% on Friday, giving both the stock market and bond market a positive bounce.

Are interest rate increases hitting a ceiling? That is what will ultimately determine if last week is the start of a lasting stock market recovery, or just a bear market rally. We will know more after next week’s Fed statement.

Q3 Earnings Season

Publicly traded companies are required to release quarterly earnings to the public, and late October marks the height of Q3 earnings season, for the quarter ending September 30th. In general, earnings have been solid, with 71% of companies reporting beating earning expectations so far with more than half of all S&P 500 companies reporting. However, remember that companies guide analysts to expectations – for them not to meet or beat earnings, something has to go wrong – and 25% of companies missed earnings.

The other positive for the market? Valuation ratios have corrected significantly. Valuation ratios are essentially a ratio that allows us to compare stocks on an equivalent basis. Price to earnings, or P/E, is the most commonly used valuation ratio. Current P/E ratios vs forward earnings are now below the 5-year and 10-year averages, leading many to hope that could help us find a bottom in the market. However, if interest rates rise further, or earnings outlooks weaken, there could be more downside to come.

Now for the not-so-good news out of Q3 earnings season… two-thirds of S&P 500 companies giving guidance for the coming Q4 have given negative guidance. This means they are LOWERING earnings expectations for the coming quarter. Part of the market sell-off this year has been the decline in earnings growth and continued downward revisions to earnings outlooks.

One last data point I’d like to touch on – note the 2022 expected revenue vs. earnings growth for the year. Revenue growth for the S&P 500 is expected to be up over 10%, while earnings growth is expected to be up just 6%. When revenue growth outpaces earnings growth that means profit margins are declining. It means that top-line price increases by companies are NOT keeping pace with the cost increases they are experiencing.

We can see this in net profit margins by sector as well. For the current quarter, most sectors are seeing profit margins below their 5-year average. There has been lots of rhetoric about price gouging by corporations as a contributor to inflation. If there was price gouging, you would expect to see significantly higher profit margins relative to historical averages – and we only really see that in Energy. And energy prices aren’t really set by companies – they are set by the global commodity futures market, which looks at energy supply and demand to determine the price. Two things could reduce energy prices – a recession which would dampen demand for energy, or increasing supply, which is currently restricted by Russia, OPEC has cut production, and US producers aren’t investing in increasing production either, as they normally would when prices are high, because domestic energy policy caps their future.

Q3 GDP Surprise

The other market boost last week came from the release of Q3 GDP on Thursday. On a seasonally adjusted and annualized basis, Q3 GDP was up +2.6%, after 2 consecutive quarters to date of GDP declines, surprising many.

The headline was positive, but digging into the details left most economists still concerned about the overall economic outlook. All of the positive real growth for the quarter was driven by an increase in exports, largely of petroleum products to Europe, and a decline in imports, which has a positive impact on GDP.

Consumer spending on services was up, but spending on goods is falling. And all positive gains from consumer spending was more than offset by significant declines in private investment. This was largely driven by declines in residential investment (people buying fewer homes with rising interest rates), and businesses reducing inventory, a sign of their own weaker outlooks for the economy.

How to Find Scholarships for College

There are lots of headlines lately about student loan forgiveness, the student loan crisis, and the rising cost of college. Those are the facts we all know too well. What we hear about less is how to pay for college that doesn’t involve student loans or even saving up in a 529 plan to pay out of pocket. Today’s guest, Jean O’Toole is the author of Scholarship Strategies and co-Founder of Connections 101, where she helps families navigate the world of private scholarships. Over 150,000 students nationwide have attended her presentations, and her strategies have helped students win up to $200,000 for college.

Learn more about private scholarhips and how you can find money for your kids’ future education – outside of the traditional academic merit and sports paths – and you can start at any age! Be sure to listen to hear the special FREE offer for Family Finance Mom listeners to help you get started on your scholarship search!

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Two major data points to come next week – the Fed’s November statement on Tuesday and Friday, the Employment Situation Report for October. Also, Q3 earnings season continues. Next week’s deep dive? Let’s take a walk through the history of the double dip recession of the early 1980s – the period most akin to what we are experiencing now – and the policies crafted by then Fed Chair Paul Volcker, the playbook the Fed is following today.

Have a question you’d like me to cover on an upcoming episode of Finance Explained? You can record your question (just click message), and it just may be featured in an upcoming deep dive! You can also join me every Monday and Wednesday at 9AM ET on Instagram for LIVE Q&A!

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