Market Commentary: Market Recap

Market Update for the Month Ending October 31, 2016

October held tricks and treats for financial markets
Equity markets around the world had a tricky October. The Dow Jones Industrial Average lost 0.79 percent while the Nasdaq and S&P 500 indices were down 2.27 percent and 1.82 percent, respectively. All three spent most of the month in the red, as concerns about weak economic news and the presidential election weighed on returns.

A treat came in the form of better corporate earnings. As of October’s end, with 58 percent of S&P 500 companies having reported earnings, the blended third-quarter earnings growth rate was 1.6 percent, up from the 1.7-percent decline expected at the start of the period.

Technical trends remained positive for the major U.S. indices in October. All three stayed comfortably above their 200-day moving averages.

Developed international markets had a tricky October as well. The MSCI EAFE Index was down 2.05 percent on concerns about the rocky path leading to a recently ratified trade deal between Canada and the European Union. But, again, technical trends were positive.

Emerging markets, as represented by the MSCI Emerging Markets Index, ended October up 0.25 percent. Technicals were strong, with the index staying above its 200-day moving average.

The U.S. fixed income sector had a difficult October, as the Barclays Capital Aggregate Bond Index lost 0.76 percent. Much of the weakness can be attributed to an increase in Treasury yields.

U.S. corporate high-yield bonds performed better. The Barclays Capital U.S. Corporate High Yield Index finished October up 0.39 percent, driven by tightening spreads on high-yield bonds.

Economic data recovers from slowdown
The economic data released in October held more treats than tricks. Employment growth was strong, with 167,000 jobs added in September, and both hours worked and wages increased. Average hourly earnings growth continued its uptrend, as illustrated in Figure 1.

Figure 1. Average Hourly Earnings, 2008–2016

Despite positive employment and income news, consumer confidence dropped somewhat, due in large part to a downturn in how consumers felt about present conditions.

Business confidence increased in October. The ISM Manufacturing and Non-Manufacturing indices rebounded, with manufacturing returning to expansionary territory and the non-manufacturing index hitting an annual high.

Durable goods orders declined in October, indicating that businesses may be postponing large purchases. Housing also retreated slightly, with a slowdown in starts and new home sales; confidence, however, seemed strong, as existing home sales increased.

Gross domestic product (GDP) growth exceeds expectations
The first estimate of third-quarter GDP growth was a treat, at 2.9 percent, well above expectations. This solid number shows that the economic recovery is continuing. But the report’s details included some tricks. A large portion of GDP growth was driven by increases in exports and inventories, which, though positive, may be linked to exceptional events such as a weakening U.S. dollar and therefore not guaranteed to continue.

Most risks now political
Although many polls and betting markets favor a Clinton victory, changes to that expectation may increase economic uncertainty, perhaps engendering market volatility. For example, the recent announcement that the FBI is investigating e-mails related to a high-level Clinton staffer caused a major swing in global equity and foreign exchange markets, and we could see more swings like that.

Apart from election concerns, the Federal Reserve (Fed) has created uncertainty around whether it will raise interest rates in December. Even though the market expects it to do so, the FOMC has cautioned that any rate hike would depend on economic conditions; a failure to hike rates when expected could rattle markets.

Short-term volatility likely, but fundamentals look good
With investors uncertain about the election and the Fed, market volatility is possible. That said, positive economic news and the return of earnings growth should help bolster markets. As always, short-term swings can be worrying, so a well-diversified portfolio matched with a long-term perspective offers the best path to reaching financial goals.

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 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 Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip 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.

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