Investing 07-11-2022 18:10 26 Views

Should you buy the Dow Jones index after the huge October gain?

The Dow Jones index returned 14% in October; the best October return ever. The performance is even more impressive, considering that the Federal Reserve runs a tightening monetary policy and plans to tighten financial conditions even further.

Investors bought stocks in the hope of a Fed pivot. However, the pivot did not come, but the Dow’s October performance remains.

So what are the implications for the months ahead? If history tells us anything, the Dow should deliver a positive return in the next 3, 6, and 12 months.

Dow delivers a positive return after a 10% month gain

Since World War II, the Dow Jones has delivered a positive return after a 10% or more month gain. More precisely, in the 3 months following an outsized return, the Dow gained, on average, another 5.9%.

Furthermore, in the 6 months following a gain of more than 10%, the Dow gained 10.6% on average. Finally, in the first year following a 10% or more month gain, the Dow delivered a 15.9% gain.

In other words, investors have all the reasons to be bullish on the Dow Jones.

Not everyone is bullish on stocks

The tech sector is telling a different story. Names like Peloton, DocuSign, Snap, or Zoom, are down big time. For example, Peloton dropped -91.4% from its peak.

A recession in the tech sector might mean that investors rotate their funds into other sectors. While this supports the bullish case for the Dow Jones, it is worth mentioning that not everyone is bullish on stocks.

Take Paul Singer, the legendary investor from Elliott Management, one of the oldest fund managers. Elliott manages around $60 billion in assets, and according to the last letter delivered to investors, Singer is extremely bearish on equities.

Singer sees inflation as the biggest problem; a prolonged recession would be needed to reduce it. You can read the full letter here.

That being said, the true test for equities comes later this week when the US CPI data for October is released. Any sign of inflation cooling down might lead to another leg higher for the Dow Jones index.  

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