THE MONTH IN BRIEF
Bulls were reined in during October. The S&P 500 lost
1.94% as Wall Street responded unenthusiastically to the fall earnings season.
Even though much of the economic news that emerged in October was good,
investors saw an interest rate hike on the horizon and remained concerned about
an increasingly controversial presidential race. Consumer confidence waned, but
improved manufacturing, consumer spending, and retail sales numbers all
factored into stronger growth. New and existing home sales accelerated. The
price of oil rose, then quickly fell; the price of gold slipped, then recovered
just a bit. Overseas, a timeline was set for the Brexit. In the big picture,
appetite for risk waned as investors remained cautious.1
DOMESTIC ECONOMIC HEALTH
Economic
indicators flashed clear signals that the economy was picking up. Household
spending rose a healthy 0.5% during September, the most since June. Household
incomes rose 0.3% in the ninth month of the year. Retail sales were up 0.6% for
September, with core retail purchases rising 0.5%.2,3
Important twin gauges of business activity showed both
manufacturing and service sector growth. The Institute for Supply Management’s
non-manufacturing purchasing manager index jumped up to a reading of 57.1 in
September, improving 5.7 points. ISM’s factory PMI also recovered from an
August spent in contraction territory, rising 2.1 points to 51.5 in September;
even more encouragingly, ISM’s new factory orders index increased by 6.0
points.3,4
Complementing all this, the federal government said that the
economy grew 2.9% in the third quarter – a real upturn from the 1.4% GDP
recorded for Q2.5
Had full employment been reached? Perhaps it was close at
hand, since the hiring pace seemed to be moderating. The Department of Labor
said that companies had added 156,000 net new jobs in September, while revising
the August gain north to 167,000. The jobless rate rose slightly to 5.0%; the
U-6 rate including the underemployed remained at 9.7%. Average hourly wages
improved another 0.2%.3
Was inflation pressure mounting? Not really. The PCE price
index advanced 0.2% in September, which left the core PCE index up 1.7%
year-over-year, the same as in August. The Consumer Price Index showed a 1.5%
annual gain in September, up from 1.1% a month earlier; core consumer prices
were up 2.2% in 12 months, ticking down from 2.3% in August. Producer prices
rose 0.3% in September, but that still left them up just 0.7% year-over-year.2,3
Some indicators did descend, most notably those measuring
consumer confidence. The Conference Board’s monthly barometer dipped 4.9 points
in October to a respectable 98.6 mark, while the University of Michigan
consumer sentiment index fell to 87.2 at month’s end. Headline capital goods
orders also declined 0.1% for September, with core orders down 1.2%.5
GLOBAL ECONOMIC HEALTH
In
London, United Kingdom prime minister Theresa May announced definite plans for
the Brexit. The U.K. will invoke Article 50 of the Lisbon Treaty no later than
the end of March 2017. Assuming this occurs, the U.K. will leave the European
Union in the summer of 2019. Until then, it intends to remain a player in all
E.U. summits and member state negotiations. Speaking of the broader E.U.,
Eurostat reported economic growth of 0.3% for the euro area in Q3 and estimated
annualized inflation for the euro area at 0.5% in October.6,7
The
World Bank projected 6.7% growth for China in 2016, declining to 6.5% in 2017,
and then 6.3% in 2018. It believes that the second-fastest growing economy in
Asia this year will be that of the Philippines at 6.4%. Malaysia’s 2016 GDP is
projected at 4.2%; Indonesia’s, at 4.8%. China aside, the Bank expects growth
to pick up across Asia in the near future, projecting 4.8% growth for the rest
of the region’s economies this year, 5% GDP in 2017, and 5.1% growth for 2018.
Meanwhile, news arrived that Japan’s retail sales and industrial output were
flat in September; retail sales were down for a seventh straight month and 1.9%
lower over the past 12 months.8,9
WORLD MARKETS
Many foreign indices outperformed ours. To
our respective north and south, the TSX Composite advanced 0.42% last month;
the Bolsa, 1.62%. Argentina’s MERVAL rose 7.16%. European indices had a good
month – there were gains of 1.47% for the DAX, 1.37% for the CAC-40, 4.81% for
the IBEX 35, 0.59% for the Micex, and 0.80% for the FTSE 100. The FTSEurofirst
300 was an exception, losing 0.90%.10
The Nikkei 225 soared 5.93% during October
to pace the major Asian indices. The Shanghai Composite was not that far
behind, rising 3.22%. October also brought gains of 0.66% for India’s Sensex
and 2.49% for the FTSE Taiwan 50. Australia’s All Ordinaries retreated 2.22%,
and Hong Kong’s Hang Seng, 1.56%. The MSCI World index lost 2.01%, but the MCSI
Emerging Market index rose 0.18%.10,11
COMMODITIES MARKETS
As the Halloween trading day drew to a
close on Wall Street, a look at the COMEX and NYMEX showed monthly losses for
both gold and oil. The yellow metal slipped 3.27% for the month, settling at
$1,276.70. Light sweet crude dropped to $46.76 at month’s end with oil
investors still awaiting finalization of OPEC’s deal to restrain output;
futures took a 2.68% fall for October.12
Reviewing the performance of other
commodities last month, we see solid gains for some key crops. Coffee rose
9.25%; corn, 5.80%; cotton, 4.02%; soybeans, 5.30%; and wheat, 2.86%. Cocoa
lost 0.90% in October; sugar, 2.09%. Among metals, silver slipped 7.09%;
platinum fell 4.71%; and copper, 0.11%. Silver finished the month at $17.84.
Unleaded gasoline futures lost 4.66% in October; heating oil futures, 1.62%.
Natural gas futures gained 3.65%. The U.S. Dollar Index settled at 98.32,
rising 3.03% in a month.1,12
REAL ESTATE
Aside
from a drop in groundbreaking, the news out of this sector was decidedly
upbeat. New home sales rose 3.1% in the ninth month of 2016, taking the
12-month advance to 29.8% and leaving the pace once again near a 9-year high.
Meanwhile, the National Association of Realtors noted a 3.2% monthly advance
for existing home sales.3,13
Home prices – as measured by the 20-city S&P/Case-Shiller
index – were up 5.3% year-over-year as of August, compared with 5.0% in the
year ending in July. The Census Bureau said that building permits increased 6.3% for September; though,
housing starts did retreat 9.0%. Pending home sales were up 1.5% for September
according to NAR.3,5
Mortgages grew more expensive last month. By October 27, the
mean interest rate for the 30-year FRM was at 3.47%, according to Freddie Mac’s
Primary Mortgage Market Survey, while average rates on the 15-year FRM and the
5/1-year ARM respectively stood at 2.78% and 2.84%. Back on September 29, the
mean rate on the 30-year loan averaged 3.42%; the average interest on the
15-year fixed was 2.72%; and the mean interest on the 5/1-year adjustable rate
mortgage was 2.81%.14
LOOKING BACK…LOOKING
FORWARD
All three
major U.S. equity indices lost ground in October. The blue chips retreated
least – the Dow Jones Industrial Average gave back 0.90% for the month.
Dropping 2.31%, the Nasdaq Composite exceeded the S&P 500’s 1.94% loss. The
Russell 2000 stumbled 5.42%. Unsurprisingly, considering all this, the CBOE VIX
soared 29.42% with uncertainty rising on Wall Street. The Halloween settlements:
DJIA, 18,142.12; NASDAQ, 5,189.13; S&P, 2,126.15; RUT, 1,191.39; and VIX,
17.06. The VIX outgained all consequential U.S. indices last month by a wide
margin; the PHLX Utility Index logged the biggest advance among the equity
indices for October, rising 1.12%.1
At this writing, it seems highly unlikely that the
Federal Reserve will authorize an interest rate hike at the start of November,
as the Federal Open Market Committee has historically preferred to refrain from
any policy decisions that could influence presidential elections. According to
FactSet data, year-over-year earnings growth is apparent for the first time
since Q1 2015 (blended Q3 earnings growth was at 1.6% through Halloween).
Still, there is nothing resembling a bull run as we enter November. Hopefully,
some risk appetite will return after the election, and investors will view
solid economic indicators as validations of an improving economy, first, and as
further evidence for a federal funds rate increase, second. Wall Street could
see a lot of volatility this month, not merely reflective of the election. We
can only hope the evident tension among institutional investors eases and the
market surprises to the upside.18
UPCOMING
ECONOMIC RELEASES: After the Federal Reserve
policy statement on November 2, the rest of the major items on the economic
release slate arrives in this order: the ISM October non-manufacturing PMI;
September factory orders and the October Challenger job-cut report (11/3); the
Department of Labor’s October employment report (11/4); September consumer
credit (11/7); the preliminary November consumer sentiment index from the
University of Michigan (11/11); October retail sales (11/15); the October PPI
and October industrial output (11/16); the October CPI and October housing
starts and building permits (11/17); October existing home sales (11/22); the
final November University of Michigan consumer sentiment index, October new
home sales, October capital goods orders, and the minutes from the November
Federal Reserve policy meeting (11/24); the newest consumer confidence index
from the Conference Board, the September S&P/Case-Shiller home price index,
and the second estimate of Q3 growth (11/29); and then the November ADP
payrolls report, a new Federal Reserve Beige Book, and October PCE prices,
consumer spending, and pending home sales (11/30).
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accurate. MarketingPro, Inc. is not affiliated with any
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not be relied on for the purpose of avoiding any Federal tax penalty. This is
not a solicitation or recommendation to purchase or sell any investment or
insurance product or service, and should not be relied upon as such. The Dow
Jones Industrial Average is a price-weighted index of 30 actively traded
blue-chip stocks. The NASDAQ Composite Index is an unmanaged, market-weighted
index of all over-the-counter common stocks traded on the National Association
of Securities Dealers Automated Quotation System. The Standard & Poor's 500
(S&P 500) is an unmanaged group of securities considered to be
representative of the stock market in general. It is not possible to invest
directly in an index. The Russell 2000 Index measures the performance of the
small-cap segment of the U.S. equity universe. The CBOE Volatility Index®
(VIX®) is a key measure of market expectations of near-term volatility conveyed
by S&P 500 stock index option prices. NYSE Group, Inc. (NYSE:NYX) operates
two securities exchanges: the New York Stock Exchange (the “NYSE”) and NYSE
Arca (formerly known as the Archipelago Exchange, or ArcaEx®, and the Pacific Exchange).
NYSE Group is a leading provider of securities listing, trading and market data
products and services. The New York Mercantile Exchange, Inc. (NYMEX) is the
world's largest physical commodity futures exchange and the preeminent trading
forum for energy and precious metals, with trading conducted through two divisions
– the NYMEX Division, home to the energy, platinum, and palladium markets, and
the COMEX Division, on which all other metals trade. The S&P/TSX Composite Index
is an index of the stock (equity) prices of the largest companies on the
Toronto Stock Exchange (TSX) as measured by market capitalization. The Mexican
Stock Exchange commonly known as Mexican Bolsa, Mexbol, or BMV, is the only
stock exchange in Mexico. The MERVAL Index (MERcado de VALores, literally Stock
Exchange) is the most important index of the Buenos Aires Stock Exchange. The
DAX 30 is a Blue Chip stock market index consisting of the 30 major German
companies trading on the Frankfurt Stock Exchange. The CAC-40 Index is a
narrow-based, modified capitalization-weighted index of 40 companies listed on
the Paris Bourse. The IBEX 35 is the benchmark stock market index of the Bolsa
de Madrid, Spain's principal stock exchange. The MICEX 10 Index (Russian:
Индекс ММВБ10) is an unweighted price index that tracks the ten most liquid
Russian stocks listed on MICEX-RTS in Moscow. The FTSE 100 Index is a share
index of the 100 companies listed on the London Stock Exchange with the highest
market capitalization. The FTSEurofirst 300 Index comprises the 300 largest
companies ranked by market capitalisation in the FTSE Developed Europe Index. Nikkei
225 (Ticker: ^N225) is a stock market index for the Tokyo Stock Exchange (TSE).
The Nikkei average is the most watched index of Asian stocks. The SSE Composite
Index is an index of all stocks (A shares and B shares) that are traded at the
Shanghai Stock Exchange. The BSE SENSEX (Bombay Stock Exchange Sensitive
Index), also-called the BSE 30 (BOMBAY STOCK EXCHANGE) or simply the SENSEX, is
a free-float market capitalization-weighted stock market index of 30
well-established and financially sound companies listed on the Bombay Stock
Exchange (BSE). The FTSE TWSE Taiwan 50 Index consists of the largest 50
companies by full market value, and is also the first narrow-based index
published in Taiwan. The All Ordinaries (XAO) is considered a total market
barometer for the Australian stock market and contains the 500 largest
ASX-listed companies by way of market capitalization. The Hang Seng
Index is a freefloat-adjusted market capitalization-weighted stock market index
that is the main indicator of the overall market performance in Hong Kong. The
MSCI Emerging Markets Index is a float-adjusted market capitalization index
consisting of indices in more than 25 emerging economies. The MSCI World Index is a free-float weighted equity index that
includes developed world markets, and does not include emerging markets. The US Dollar Index measures the performance of the U.S. dollar
against a basket of six currencies. The PHLX Utility Sector Index is composed
of geographically diverse public U.S. utility stocks. Additional risks are
associated with international investing, such as currency fluctuations,
political and economic instability and differences in accounting standards.
This material represents an assessment of the market environment at a specific
point in time and is not intended to be a forecast of future events, or a
guarantee of future results. Past performance is no guarantee of future
results. Investments will fluctuate and when redeemed may be worth more or less
than when originally invested. All economic and performance data is historical
and not indicative of future results. Market indices discussed are unmanaged.
Investors cannot invest in unmanaged indices. The publisher is not engaged in
rendering legal, accounting or other professional services. If assistance is
needed, the reader is advised to engage the services of a competent
professional.
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