US and International Equities
The major market indices, as denoted by the S&P 500 and Nasdaq, gave back ground again in October with almost all sectors finishing in the red. For the second consecutive month the utilities sector was the only one in the green. The sectors down the most for the month were information technology, which was down over 5%, energy, health care, and real estate.
International equities were a mixed bag. Emerging markets stocks, as denoted by MSCI Emerging Markets (EM), finished higher. However, developed market equities, as indicated by the MSCI EAFE, finished lower as did their US counterparts. The US dollar barely budged.
Small and midcap stocks were bright spots in October. Both the S&P 400 Midcap Index and the small cap Russell 2000 Index finished higher. “Historically, small caps have typically led the inception of an economic recovery, so their recent market leadership could be an indication of a new sustainable economic expansion,” noted LPL Financial Equity Strategist Jeffrey Buchbinder. For more of our thoughts on small caps, please read last week’s Weekly Market Commentary titled Three Reasons We Like Small Caps.
Fixed Income, Currencies, and Commodities
The bellwether Bloomberg Barclays US Aggregate Index finished the month lower. Major bond sectors fell in lockstep. High yield bonds, designated by the Bloomberg Barclays High Yield Index, finished the month up 0.5%. International bonds, denoted by the FTSE World Government Bond Index, and emerging markets debt, measured by the JP Morgan Emerging Markets Bond Index (EMBI), also ended the month in the red.
Commodities were a mixed bag this month. The dichotomy of natural gas and oil is worth noting. Natural gas finished the month on a tear, up over 30%, whereas oil finished down 11%. Moreover, silver and gold finished the month lower, but are up over 20% year-to-date.
US and International Economic Data Recap
Last month the Federal Open Market Committee (FOMC) released minutes from its September policy meeting, noting that the US economy had regained more jobs than expected in August. Also, the Federal Reserve (Fed) stated that short-term rates would remain targeted at 0% to 0.25%. Rates could stay anchored near zero until inflation averages at 2% over a period of time.
The minutes credited fiscal policy measures for the stronger-than-expected economic recovery. At the same time, many members on the FOMC noted that their outlook assumed more fiscal support and that if any proposed fiscal stimulus was significantly smaller or arrived later than the FOMC expected, the pace of the economic recovery could be slower than anticipated.
The third quarter gross domestic product (GDP) expanded at an annualized rate of over 33%, which was ahead of the Bloomberg consensus expectations of 32%. This was the largest quarter-over-quarter gain since WWII and followed the sharpest quarter-over-quarter decline during the same time period.
The US unemployment rate still remains high compared to history. COVID-19 continues to play an adverse role on service industry employment. Even though the unemployment rate has declined from a peak of approximately 15%, we are quite far from having an economy at full employment. The eventual approval and distribution of a COVID-19 vaccine should help the employment landscape.
Retail sales were robust in September, rising 1.9% month over month compared to Bloomberg economists’ median expectation of 0.8% (source: US Census Bureau). Delayed back-to-school spending may have created seasonal distortions in the data, as September is usually a weak month following back-to-school spending in August.
With the election just around the corner, the political landscape for the next four years in Washington, DC, will be on investors’ minds until a winner is officially declared. COVID-19 news along with vaccine progress are also not going to be too far from investor’s thoughts.
Progress on a second round of stimulus, which has been viewed as a low-probability event by many investors, is seen by many as needed and, we believe, may be on the table immediately after the election. This would be quite welcomed given the ongoing impact of the pandemic on the hardest-hit areas of the domestic services economy.
Moreover, as we are still in the center of earnings season, companies’ results and management outlooks will provide an indication of the state of the economic recovery. Market participants will be focused on forward guidance along with cues concerning the economy’s direction. Results thus far have been promising.
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