Hello all – we hope you had a nice October.
It was a very uneventful month for the markets, which saw stocks make new record highs.
It was a very uneventful month for the markets, which saw stocks make new record highs.
October is a famous month for sharp drops in stocks and very volatile trading, but this October was very tame. Volatility even dropped as the month progressed.
The market was boosted by improvements in many of the items investors were previously concerned with. The China trade fight abated and the Brexit issue was pushed back a few months. Corporate earnings have been better than expected and interest rates are moving lower. All-in-all, the backdrop looks pretty good.
However, there remains a lot of worry amongst investors. Barron’s put out a poll showing that investment managers are at their least optimistic level in 20 years. While this is worth noting, we also consider the old saying that bull markets die on euphoria – clearly there is no euphoria in the markets even at these record highs.
However, there remains a lot of worry amongst investors. Barron’s put out a poll showing that investment managers are at their least optimistic level in 20 years. While this is worth noting, we also consider the old saying that bull markets die on euphoria – clearly there is no euphoria in the markets even at these record highs.
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As for the main stories of the month, we’ll start with the Fed.
They held another policy meeting this month and announced a cut in interest rates, as expected (lower interest rates make it cheaper to borrow money and theoretically boost the economy). The market likes lower rates and rose on the news.
They held another policy meeting this month and announced a cut in interest rates, as expected (lower interest rates make it cheaper to borrow money and theoretically boost the economy). The market likes lower rates and rose on the news.
Also helping the market were comments from Fed Chairman Powell that suggested the Fed will lower rates further if the economy weakens and will not raise rates if the economy improves – only if inflation picks up. Inflation has been below their target for many years now and shows few signs of increasing, suggesting the Fed is unlikely to raise rates any time soon (although we argue the Fed should be aiming for 0% inflation, which is their legally prescribed mandate from Congress, not 2%. But we digress…).
Investors see little chance of the Fed cutting rates again this year:
Investors see little chance of the Fed cutting rates again this year:
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Corporate earnings were another big story this month.
A little more than half of the companies in the S&P 500 have reported results and the earnings have been better than expected. Of course, the bar was set very low and the -3.2% earnings growth (or earnings decrease, actually) is better than the -4.7% analysts were initially estimating.
A little more than half of the companies in the S&P 500 have reported results and the earnings have been better than expected. Of course, the bar was set very low and the -3.2% earnings growth (or earnings decrease, actually) is better than the -4.7% analysts were initially estimating.
Another good sign is that 75% of companies have beaten their estimates, as well. The chart below shows just how rare that is.
Lastly, it’s worth noting that analysts are predicting this to be the bottom in earnings and they will improve going forward. Next quarter is expected to be flat while growth picks up in 2020. The stock market tends to be forward-looking, so we believe that is playing a part in its current rise.
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Finally, economic data remains mixed, but overall we’d say a little better than last month.
Economic growth is still a little sluggish, but positive. The most recent report shows the economy growing at 1.9% in the third quarter.
Economic growth is still a little sluggish, but positive. The most recent report shows the economy growing at 1.9% in the third quarter.
Manufacturing has been the main drag and a lot of that can probably be attributed to the trade war. More economists are predicting manufacturing will start improving soon, which should help the economic data.
This weakness has hurt consumer sentiment as both consumer and small business confidence has fallen.
Despite these negatives, the consumer data actually looks pretty decent.
Consumer spending remains very strong, wages are up, and the employment report out this morning shows a strong job market.
Consumer spending remains very strong, wages are up, and the employment report out this morning shows a strong job market.
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Where does the market go from here? Stocks look to be a little on the expensive side in the short term. We think they probably have a little room to run higher, but the odds of a decline are growing. We would hesitate to put new money in the broader market here and prefer to find individual undervalued names.
Of course, unpredictable items like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
Of course, unpredictable items like comments from government officials on the trade war or from the Fed have the ability to push the market either way, so some caution is warranted.
This commentary is for informational purposes and is not investment advice, an indicator of future performance, a solicitation, an offer to buy or sell, or a recommendation for any security. It should not be used as a primary basis for making investment decisions. Consider your own financial circumstances and goals carefully before investing. Past performance cannot guarantee results.
