Stock Skeptics Forced to Recant by Best October Run in Six Years

From a global tremor in sovereign bonds to a spike in energy costs, October lived up to its reputation as one of the most volatile months for markets. To stock bears’ chagrin, though, the tumult did nothing to halt the relentless rally in equities.

Not even disappointing results from two of the world’s biggest companies could slow the S&P 500’s push higher. It ended the week at a record despite declines in Apple Inc. and Inc., rolling up a gain of almost 7% for the month to notch the best October in six years.

Some credit for the market resilience goes to an earnings season that, outside of a few hiccups, has delivered an almost-unprecedented rate of positive surprises. Yet much of the latest rally comes down to the return of animal spirits. Take the options market, where traders piled into bullish calls to juice rallies in stocks like Tesla Inc. Inflows into equity funds also climbed to a seven-month high, as a majority of bears were forced to convert to buyers.

Momentum begets momentum. That can be especially true in the final two months of the year, when money managers get a last chance to make up ground before their annual report card is set. About three-fifths of the group trail their benchmarks, so an increase in risk-taking could add further fuel to a rally that has pushed the S&P 500 up more than 22% in the first 10 months.

“History, risk appetite and earnings all point to a ‘melt-up’ into year-end,” said Chris Harvey, head of equity strategy at Wells Fargo & Co. He expects the S&P 500 to finish December at 4,825, a 4.8% increase from Friday’s close of 4,605. “We believe it is too early to leave the party.”