Nov. 25, 2019 Market Update for the Month Ending October 31, 2019
More treats than tricks for markets in October
October was another positive month for markets. The S&P 500 gained 2.17 percent in October and finished the month at a new high. The Dow Jones Industrial Average grew by 0.59 percent, while the Nasdaq Composite led the way with a 3.71 percent return.
According to Bloomberg Intelligence, the anticipated third-quarter earnings decline for the S&P 500 is 2.1 percent, with 60 percent of companies reporting. This result is up from estimates of a 3.2 percent decline at the end of September. In addition, all three major indices spent the month above their respective 200-day moving averages.
The MSCI EAFE Index increased by 3.59 percent during the month. It spent the beginning of October below its 200-day moving average before breaking above the trend line for the rest of the month. The MSCI Emerging Markets Index increased by 4.23 percent and finished above the trend for the first time since July.
The Federal Reserve cut the federal funds rate by 25 basis points at its October meeting. Interest rates rose slightly on the long end of the curve. The 10-year Treasury yield started the month at 1.65 percent and ended at 1.69 percent. The Bloomberg Barclays U.S. Aggregate Bond Index increased by 0.30 percent during the month, and the Bloomberg Barclays U.S. Corporate High Yield Index gained 0.28 percent.
Economic data points to slower growth
October’s positive returns came despite recent data releases that painted a picture of slower growth. Annualized third-quarter gross domestic product growth came in at 1.9 percent, down from 2 percent in the second quarter and 3.1 percent in the first quarter. While slowing growth is disappointing, economists had forecast a larger drop to 1.6 percent, so there is some reason for optimism here. This result was driven by stronger-than-expected consumer spending, which offset a slowdown in government spending and business investment.
Manufacturer confidence hit a 10-year low in September. After rebounding in August, the Institute for Supply Management (ISM) Nonmanufacturing index fell to 52.6 in September. The ISM composite index, which aggregates the manufacturing and nonmanufacturing indices, has fallen sharply since reaching a high point in September 2018 (see Figure 1).
Figure 1. ISM Composite Index, 2009–Present
Durable goods orders fell by 1.1 percent in September, against expectations for a more moderate decline of 0.7 percent. Industrial production fell 0.4 percent, and manufacturing output fell 0.5 percent. This trend points toward continued weakness in business confidence and spending for the immediate future.
Consumer confidence rebounds as spending continues
The University of Michigan consumer sentiment index increased from 93.2 in September to 95.5 in October, supported by strong markets and low unemployment. Consumer spending increased by 0.2 percent in September, marking the seventh straight month of growth. This result was supported by a 0.3 percent increase in personal income.
The housing market brought good news as well. Existing home sales fell slightly in September. On a year-over-year basis, however, they rose by a healthy 3.9 percent. Mortgage rates have dropped near two-year lows, as the central bank continues to cut rates and support the ongoing economic expansion.
Political risks shift in October
We entered October with concerns about the escalating trade war between the U.S. and China, as well as the risk of a “no-deal” Brexit. Both of these risks receded during the month, but new concerns have emerged to take their place.
In the U.S., the impeachment inquiry highlights the risk impeachment presents to markets. With public hearings set to begin this month, growing uncertainty may cause volatility. Abroad, the British elections are set for mid-December, as the U.K. and the European Union hammer out a Brexit deal. If trade war tensions ratchet back up or the protests in Hong Kong increase in intensity, we may see additional market volatility.
Short-term risks remain, but fundamentals are solid
Economic fundamentals remain solid in the U.S. While growth appears to be slowing, slower growth is still growth. Rebounding consumer confidence and continued strong consumer spending indicate the economy is in a better place than the headlines suggest. If business confidence and spending can follow suit, the economy would be poised for accelerated growth. While short-term volatility may be likely given the political risks, the strong fundamentals should continue to support markets.
All information according to Bloomberg, unless stated otherwise.
Disclosure: The Financial Consultants of Manning Wealth Management, Inc. are registered representatives and investment adviser representatives with/and offers securities and advisory services through Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. They are also an Investment Adviser Representatives of Manning Wealth Management. Financial planning services offered by Manning Wealth Management are separate and unrelated to Commonwealth. Fixed insurance products and services offered through CES Insurance Agency or Manning Wealth Management.
Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®.
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