Market Commentary: Market Recap
Market Update for the Month Ending October 31, 2015
October sees a return of market strength
After a difficult third quarter, October defied expectations with across–the–board gains in U.S. markets. The Dow Jones Industrial Average, S&P 500 Index, and Nasdaq were up 8.59 percent, 8.44 percent, and 9.38 percent, respectively.
Markets rose as worries from previous months receded. China posted better–than–expected numbers, Europe continued to grow, and U.S. earnings reports came in better than anticipated. Further, a Federal Reserve statement about the economy at month–end was unexpectedly positive.
Fundamentally, conditions remain reasonably healthy. Corporate earnings have been beating expectations, and the estimated aggregate company growth rate, though declining because of energy companies, has been revised upwards. Revenues, however, have been less positive, with fewer companies than usual beating expectations.
The technical trend for U.S. markets turned positive toward month–end, with indices moving back above their 200–day moving averages.
Foreign markets also recovered in October. The MSCI EAFE Index, representing developed markets, was up 7.82 percent, and the MSCI Emerging Markets Index posted a 7.04–percent gain. Technically, however, both indices remain below their 200–day moving averages.
Fixed income markets had a challenging month, as a decline in investor fears and a statement from the Fed at month–end that many took as hawkish combined to drive interest rates higher. The 10–year Treasury yield increased from 2.05 percent at the beginning of October to 2.16 percent by month–end. The Barclays Capital Aggregate Bond Index returned 0.02 percent for the month.
U.S. economic recovery slows down
In contrast to market performance, the U.S. economy continued to slow. The employment report disappointed for the second straight month. Wage growth was disappointing, average hours worked per week declined, and, although the layoffs number remained very low, it still signaled a slowdown. Personal income and spending came in below expectations.
Although manufacturing and energy were two areas of significant weakness, there was some good news. The services sector was very strong, as indicated by the ISM Nonmanufacturing: NMI Composite Index number, and has remained near record–high levels following the financial crisis (see Figure 1). In addition, consumer confidence either increased or remained at healthy levels, depending on the survey, and housing continued to do well.
Figure 1. ISM Nonmanufacturing: NMI Composite Index, 2005–2015
The weakness in energy and manufacturing, combined with slowing consumer spending, contributed to the anemic 1.5–percent gross domestic product growth rate for the third quarter, released in late October. This was down from the previous quarter’s growth of 3.9 percent, though in line with expectations.
Federal Reserve steps back into action
The basic health of the economy was ratified by the Fed in its regular meeting statement at October’s end, as the Federal Open Market Committee expressed more confidence in the U.S. economy than it had in September and indicated that it could raise rates in December. For the first time in years, the prospect of a rate increase was greeted by a market rally rather than a sell–off—a very positive development.
Halloween treats, not tricks
October has historically been a volatile month, but this year we got a powerful move up instead of down. Markets responded to better–than–expected U.S. corporate results and gradual economic improvement in the rest of the world. Nevertheless, markets are inherently risky. After the declines of the third quarter, we should keep in mind that we won’t always be so lucky. Risks remain, and beneficial trends won’t always be there. It is important to remain focused on the long term and maintain a diversified portfolio that can ride out any turbulence in the short and medium terms.
The continuing U.S. recovery has laid the foundation for continued profits for U.S. businesses, and economic growth has historically tended to lead to higher market valuations. This confluence of positive factors suggests that future results, in the long run, should be positive for investors and that a long–term perspective continues to be the correct one.
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.