October 2019 Market Update

October 2019 Market Update: US Equities Set New Highs; Fed Signals a Pause

October Musings:

No one seemed nervous about “The October Effect” this time around as the bell-weather S&P rose 2.2% in the month. The phrase came to be when many traders perceived stocks to decline during October (both 1929 and 1987 crashes occurred in October). Instead, third-quarter earnings reports came into sharp focus during the month to provide the market with some direction on demand, growth, profitability and outlook. Mostly positive reports and projections thus far propelled the S&P 500 to a new all-time high on October 30^th, when it closed at a level of 3046.77.

It’s no wonder with the risk-on mentality for the month that Emerging Markets topped the world indices with the best one-month performance up 4.2%. That was followed closely by International Developed stocks’ 3.6% gain. Small cap stocks came in third as the Russell 2000 index gained 2.6% in the month on top of a 2.1% return for September.

From a style perspective growth bested value this month which is a continuation of a multi-year long theme in the stock market.

Meanwhile the bond market digested its 3^rd Fed Funds cut providing a slight steepening in the yield curve from the month before, with the short end of the curve falling and the long end stuck near 1.68%. The spread in interest rates between the 2-yr Treasury and the 10-yr on Halloween stood at 17 basis points (0.17% difference) versus just 5 basis points between the two values at the end of September. Thus, the bond market is not signaling an impending recession with a widening spread and a higher yielding long bond than short term bond

Fun Market Monthly Facts:

The stand-out industry in the month was biotech, which rose 8% buoyed by Biogen’s news it was resuscitating its Alzheimer’s drug application to the FDA. BIIB shares rose 29% in the month.
October marked the 32^nd anniversary of “Black Monday” in 1987 when the S&P lost 20.5% of its value in a single day.
Despite the huge decline of the 1987 crash, the S&P 500 Index actually ended up for the year!

FOMC Meeting Update:

In late October, we got the third rate cut of the year, again by 0.25%. Importantly, the Fed signaled it is now in a holding pattern or “pause mode” versus previous meeting outcomes when the Fed signaled a continuation of rate cuts. Markets took the news in stride preferring to focus on Chairman Powell’s declaration that the Fed would not need to “raise rates anytime soon.”

Taking Stock of Economic Indicators:

October also brought us the U.S. GDP report of +1.9% growth which slowed a bit from previous quarters’ annualized growth of 2.0%. We think the main take-away is that growth is slower but relatively stable, not a rapid deceleration which would cause recession fears.

Looking at other key indicator reported during the month do not give us major cause for concern:

Conference Board Leading Economic Index: Declined slightly in September to 111.9, but still signals a slowly expanding economy through 2020.
Consumer Price Index: Unchanged in September at +1.7%.
Univ of Michigan Consumer Sentiment Rating: Rose to 95.5 from September’s 93.2 reading.
Consumer Spending: September rose +0.2%. The consumer accounts for 66% of U.S. economic activity, so always an important figure to watch. Annualized, 3^rd quarter’s spending rose +2.9%.
Jobs Reports: October payroll increases of 128,000 handily beat estimates of 75,000 proving resiliency in job creation.
Unemployment: Ticked up to 3.6% from 3.5% in September, but still below a “normal” reading of 4.2%.
Housing Starts: Down 9.4% month over month after being up a large 15.1% in August.
Inflation: 3Q report at 1.7% which is below the Federal Reserve’s core target of 2.0%
ISM Manufacturing for October: Another month of contraction posting 48.3%, but a 0.5% increase from September’s level. As a reminder, manufacturing is about 20% of the economy.

Near-Term Outlook:

We think volatility in the markets is here to stay. After all-time records are notched we typically see some consolidation, and would not be surprised if equities pulled back slightly from these new levels. In addition, with earnings season mostly in the past the market is likely to turn its attention back to trade negotiations, Brexit, and the impeachment proceedings. None of these have much to do with company fundamentals, but will move markets nonetheless.

Corporate Earnings: With about 70% of the S&P reporting as of this print, the collective y-o-y growth in earnings is -3.5%, but well within consensus expectations since 78% of earnings have beat forecasts. Notably, management discussions on earnings calls are not signaling material reductions in demand. All in all, a solid quarter of reporting across the economic sectors. Corporate highlights include 6.0% revenue growth at Proctor & Gamble, Apple’s upbeat holiday forecast for its wearables, and Visa’s beat on strong consumer spending trends for the payment processor. On the downside, Amazon’s 4^th quarter outlook was disappointing.
Trade Negotiations: The markets took their cue a few weeks back and gapped up at the prospects of a Phase One trade resolution between U.S. and China. Despite market angst on the last trading day of the month due to trade fears, most strategists believe Phase One of the trade pack will be accomplished.
Brexit Deadlines: With a negotiated Brexit deal in hand, PM Boris Johnson received another extension to formalize the British exit from the E.U. so he can gain Parliamentary support. Another line in the sand has been drawn for January 31, 2020. Before Parliament is set to vote on Brexit again, Johnson called for a December 12^th general election hoping to win more Conservative seats so the Brexit vote can go his way. Behind the scenes political campaigning is set to take place from now until the vote so the next biggest deadline will be December 12^th.

We can paint a picture of low-stable growth ahead for U.S. and some improvement in international growth for the year to come. There are very few red-flashing warning signs in the economy today as we noted above. However, we are about to turn the calendar on an election year that will probably carry with it more market volatility. We often remind ourselves and our clients that with the right asset allocation and the ability to weather the near-term movements, we’ll come out ahead on the other side instead of trying to market time each dip and rebound.

As always, your Sandy Cove team is available to answer any questions about the markets or your portfolio.

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