Market Commentary: Market Recap
Market Update for the Month Ending October 31, 2014
October lives up to its scary reputation
October provided a roller-coaster ride for financial markets. The Dow Jones Industrial Average ended the month up 2.16 percent, after dropping more than 5 percent mid-month, while the S&P 500 Index rose 2.44 percent, after a similar drop. The Nasdaq did best, posting a 3.06-percent gain, after declining more than 6 percent.
The drop was caused by a confluence of worries, including the Ebola outbreak, bad economic news from around the world, and weaker-than-expected economic news here in the U.S. But, after a short-lived pullback, most markets rallied and closed October with gains.
Fundamentally, conditions remain healthy. Corporate earnings have been beating expectations, and revenues have also grown faster than expected. Technically, the trend for U.S. markets remains positive.
Foreign markets showed trends similar to the U.S. market during October. Developed markets, represented by the MSCI EAFE Index, dropped more than 7 percent mid-month and, despite a late-month recovery, still ended up with a 1.45-percent loss. The MSCI Emerging Markets Index did better, with less than a 3-percent loss at mid-month and a 1.07-percent gain by month-end.
Fixed income markets also did well following a drop in interest rates, with the benchmark 10-year U.S. Treasury yield declining from 2.489 percent to 2.335 percent during the month. The Barclays Capital Aggregate Bond Index returned 0.98 percent for the month, while high-yield bonds, represented by the Barclays Capital U.S. Corporate High Yield Index, rose 1.19 percent.
U.S. economic recovery accelerates
The U.S. economic recovery continued to accelerate. News that 248,000 jobs had been added in September and that the unemployment rate had dropped to 5.9 percent showed that the recovery was intact. Improving employment trends led both major consumer confidence measures to seven-year highs.
The Federal Reserve endorsed the recovery, voting to end its bond-buying program. The move was quickly ratified by the announcement that the U.S. economy had grown at a 3.5-percent rate for the third quarter.
Not all news was good. Sales of durables were down, and consumer income and spending growth slowed. But most news supported an accelerating recovery.
Also supporting growth was a continuing decline in oil prices. As the graph shows, in October oil prices collapsed to levels seen only a couple of times in the past five years.
The Declining Price of Oil, May 15–October 31, 2014
The drop in oil prices could be a significant boost to U.S. growth.
Geopolitical turmoil strengthens the dollar
Continued oil price declines are possible, not only from a supply-and-demand perspective, but also as a result of a strengthening dollar. As the price of oil dropped over the past three months, the value of the dollar compared with other currencies increased.
A strong dollar helps hold down the prices of all imports and strengthens the purchasing power of the U.S. consumer. The dollar’s appreciation comes from the growing strength of the U.S. economy and the Fed’s decision to stop buying bonds.
The downside of the strong dollar is the probable negative effect on the earnings of U.S. companies. Revenue from overseas, when translated to U.S. dollars, will be negatively affected, and this could be a headwind for earnings in the next couple of quarters. Overall, though, the effect of a strong dollar could benefit the economy and market.
Halloween much less scary than it might have been
October has historically been volatile, and the extreme price swings of almost all markets during the past month lived up to that reputation. Nevertheless, the improving fundamentals of the U.S. economy and strong position of the U.S. internationally reversed the decline.
Though risks remain around the world, the U.S. economic recovery has laid the foundation for continued profit gains for U.S. businesses, and economic growth has historically led to higher market valuations. This confluence of factors suggests that future results should be positive for investors, and that the long-term perspective remains the correct one. Although volatility is possible, and even likely, the longer-term perspective is still bright.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Barclays Capital Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Barclays Capital government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Barclays Capital U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below.