October delivered serious ups and downs in the stock market, but will that trend continue throughout November? A few pieces of important news should have a big impact on stocks, and all of the factors that drove volatility in October are still present. Investors should be aware of the major market catalysts and manage their investment portfolios accordingly.

1. The Fed remains the biggest story

Monetary policy and interest rate hikes continue to be the most important stock market drivers. The Federal Open Market Committee (FOMC) had its bimonthly meeting during the first week of November and announced another interest rate hike of 75 basis points. Chair Powell's public commentary indicated that the monetary authorities have no explicity plans of reversing course in the near future.

Still, there's growing optimism that rate hikes will slow in early 2023. The latest Series I bonds bear a significantly lower rate than the previous offering, which was issued six months earlier. That's evidence that the Fed is slowly but surely combating inflation.

A podium with microphones in front of an american flag and the Federal Reserve Board of Governors seal.

Image source: Getty Images.

The Fed is also facing pressure from domestic lawmakers and international financial institutions to relax its rate hikes. American politicians are worried about high interest rates causing a potential recession and unemployment, which are never popular with their constituents. Foreign financial authorities are seeing their currencies devalued against the dollar, which can cause macroeconomic instability. 

All in all, it seems that the Fed has less incentive to maintain its aggressive approach indefinitely. That said, corporate earnings results that have been published over the last few weeks haven't been nearly as ugly as investors feared. There were some especially strong results among bellwether stocks in the industrial sector.

Along with economic indicators, corporate financial results indicate that the U.S. economy has been resilient through September. Even though inflation is getting better, it's still well above the Fed's long-term target rate. This all gave the policymakers license to maintain the interest rate hike pacing.

Ultimately, the market reacts news that doesn't match expectations. Prices already reflected the consensus 75-basis-point rate hike, but Wall Street was looking just as closely at the Fed's forward-looking commentary. Powell's comentary shows that regulators are aware of the progress they've made toward combating inflation, and the central bank certainly doesn't want to trigger an unnecessary recession. However, it also clearly communicated that there would be no abrupt change to the current rate hikes. 

October's strong market performance suggests that investors anticipate a slowdown in the Fed's contractionary measures next year. They market retreated immediately following the FOMC announcement but clawed back some of those losses to close the week. This remains the biggest story in the stock market, and investors are weighing the likelihood of a quick return to expansionary monetary policy. The market is likely to react significantly to economic data such as inflation, employment, and GDP growth.

2. Earnings season will create big winners and big losers

Third-quarter earnings season was about halfway complete at the start of November, and around 70% of reporting S&P 500 companies have exceeded analyst estimates so far. The average earnings growth rate is only 2.2%, so Wall Street's expectations were evidently gloomy for the quarter.

It hasn't all been good news. There have been more downward revisions to earnings guidance than upward revisions, which is evidence that economic conditions are deteriorating. Many of the positive results came from energy, industrials, financials, and consumer staples stocks. It seems that economic bellwethers are dealing effectively with high interest rates. Alternatively, the damage might simply be incurred later than expected. Either way, growth is definitely slowing, even if it hasn't been as bad as feared.

Meanwhile, tech stocks have been relatively disappointing. Software businesses have delighted investors in recent years by delivering growth in difficult conditions and persisting through economic cycles. They were the stars that carried the economy and stock market through the pandemic. Earnings and guidance have been rough for most of the tech-sector leaders this quarter. That's bad news for index investors and growth investors alike, because these stocks make up a huge proportion of those portfolios.

Quarterly results were good enough to fuel gains in the stock market, but disappointing earnings reports were heavily punished. Unless the Fed announces a major policy reversal, there's no reason to expect this trend to stop in November.

3. Volatility will remain elevated

The CBOE Volatility Index climbed higher in October. There were wild day-to-day swings both higher and lower, even as the S&P 500 rose nearly 8% during the month.

^VIX Chart

^VIX data by YCharts.

A number of factors are contributing to high volatility. High interest rates, fears about a global economic slowdown, instability in some major currencies, and uncertainty about Federal Reserve policy are all putting downward pressure on stocks. On the other hand, the stock market is being supported by relatively low valuation ratios, better-than-expected earnings results, and hopes that the Fed will relax its rate hikes.

Whether the news is good or bad in November, investors should be prepared for more big swings in stock prices. Make sure that your portfolio allocation matches your risk profile and time horizon. Don't panic when high volatility strikes.