Optimism over corporate profitability has been one of the key factors keeping stocks afloat. Profits did the trick again today.

The markets bounced back Friday from their two-day carnage, as strong bank earnings outweighed economic anxieties. The market apocalypse was deferred. For now.

That said, today’s relief rally faded in the late afternoon as worries about interest rates, inflation, trade war, and emerging markets kept gains in check. Stocks closed well off their session highs in volatile trading.

The Dow Jones Industrial Average and the S&P 500 racked up a third straight week of losses. Investors bought back into the market today, but they remain tentative. All 11 S&P sectors closed lower for the week.

Oil prices have generally risen over the past year, but as the chart shows, they’ve taken a tumble in October over fears that slowing economic growth will dampen energy demand:

Source: Energy Information Administration

West Texas Intermediate, the U.S. benchmark, today rose 0.96% to close at $71.65 per barrel. Brent North Sea crude, on which international oils are priced, rose 0.56% to close at $80.71/bbl. Regardless, energy stocks were laggards this week as crude takes a bearish turn.

Money in the bank…

Third-quarter earnings season started with a bang Friday, marking a busy day for the financial sector. Five major banks reported earnings before the opening bell: JPMorgan Chase (NYSE: JPM), Citigroup (NYSE: C), First Republic Bank (NYSE: FRC), PNC Financial Services (NYSE: PNC), and Wells Fargo (NYSE: WFC).

JPMorgan reported third-quarter earnings per share (EPS) of $2.34, versus expectations of $2.25. Revenue came in at $27.8 billion, beating expectations for $27.5 billion. And yet, investors expected more from the largest U.S. lender and worried about the bank’s slowing investment banking division. JPM shares today fell 1.10%.

Citigroup reported EPS of $1.73 versus expectations of $1.69. Revenue came in at $18.3 billion vs. $18.5 billion forecast. C shares rose 2.05%.

Wells Fargo posted EPS of $1.13, shy of the expected $1.17, but revenue of $21.9 billion beat the forecast of $21.8 billion. WFC shares rose 1.32%.

At a press conference today following his bank’s earnings report, JPMorgan CEO Jamie Dimon warned that rising interest rates and geopolitical tensions could torpedo U.S. economic growth.

But as a whole, bank sector earnings were strong today, boosted in large part by windfalls from the 2017 tax cut package. Banks disproportionately benefit from the reduction in the corporate income tax rate because they tend to take fewer deductions than other types of firms. The benchmark Financial Select Sector SPDR ETF (XLF) today rose 0.19%.

The bull market is now the longest in history and stocks are overvalued. With many credible analysts calling for a correction, the time is ripe to hedge your portfolio.

The October effect…

When it comes to the trepidation of stock investors, Mark Twain perhaps said it best:

“October. This is one of the peculiarly dangerous months to speculate in stocks. Other dangerous months are July, January, September, April, November, May, March, June, December, August and February.”

I wouldn’t go that far. But this October certainly has been a dangerous month for investors. Making Wall Street even more nervous is the fact that large historical market crashes have occurred during this month.

To prepare for the market turbulence ahead, you should pare back your momentum stock holdings and elevate cash levels.

You also should re-calibrate your portfolio toward stocks that do well in the late-stage of recovery. Now nearing its ninth year, the expansion is getting long in the tooth.

Typically in the late stage of the economic cycle, growth slows but inflation rises and stock valuations start to look pricey compared to earnings. That’s exactly what we’re seeing today.

The most opportune sectors in this phase include energy, utilities, health care, and consumer staples. Consumers need the products and services of these companies, regardless of the economy’s ups and downs.

As we saw today from the robust operating results of money center banks, financial stocks perform well during times of rising interest rates. Higher rates translate into a wider credit spread, making it easier for banks to turn a profit on loans. But that’s a double-edged sword, because rising rates also tend to choke-off economic recoveries and bull markets.

As you rotate toward the new market leaders, stick to your long-term goals. More volatility lies ahead, but only make modest adjustments and avoid impulsive selling. Don’t throw your portfolio to the wolves.

Friday Market Wrap

• DJIA: 25,339.99 +287.16 (1.15%)
  
• S&P 500: 2,767.13 +38.76 (1.42%)
  
• Nasdaq: 7,496.89 +167.83 (2.29%)
  

Friday’s Big Gainers

• Corium International (NSDQ: CORI) +52.83%

Biotech targeted for buyout by investment firm.

• Anaplan (NYSE: PLAN) +42.24%

Cloud services provider launches successful IPO.

• Endava (NYSE: DAVA) +12.64%

Software outsource firm posts strong earnings.

Friday’s Big Decliners

• Immune Design (NSDQ: IMDZ) -33.69%

Biotech ceases development of cancer vaccine.

• Wabash National (NYSE: WNC) -19.20%

Truck maker slashes full-year guidance.

• EXFO (NSDQ: EXFO) -14.61%

Telecom equipment maker misses on earnings.

Letters to the Editor

“How does the U.S.-China trade war hurt American technology companies?” — David K.

U.S. tech firms are dependent on Chinese component makers and smoothly functioning global supply chains, all of which are disrupted by Trump’s tariffs. China also has threatened to close its vast consumer market to U.S. exporters.

Looking for “defensive growth” measures? I’m here to help: mailbag@investingdaily.com

John Persinos is the managing editor of Investing Daily.