A Look Back at the Markets in October and Ahead to November 2018

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Nov 8, 2018 11:39:42 AM

and tagged Commentary

Leave a comment

look back at the marketsI think we are all glad October is over. U.S. markets were down between 5 percent and 10 percent at the end of the month, even after a partial recovery, and international markets were down 8 percent to 9 percent. A sudden drop in confidence, especially in the big tech stocks, also rocked markets in a way we have not seen in some time. Indeed, October lived up to its scary reputation. But what does this mean for November?

A look back

An inevitable pullback. In many respects, October's pullback should not have been a surprise. With the pending midterm elections raising angst around the country, with a China slowdown and tariff worries, and with European political risks heating up again, investors had a lot to worry about. Plus, with stocks at high levels, there was plenty of room for a decline.

The economy was also showing some unusual signs of weakness. Retail sales growth disappointed for the second month in a row, suggesting that the consumer might be starting to fade. Slower job growth and personal income growth supported that idea. Housing also continued to slow as mortgage rates rose. With the economy slowing, risks rising, and investors nervous, in hindsight, the pullback looks almost inevitable.

Worries subsiding. Since then, however, the news has improved markedly. With the midterms over, one major source of worry is gone. The result—a divided government—has historically been welcomed by markets. Job growth rebounded in a big way, suggesting that last month’s weakness was more about Hurricane Florence than anything else. Further, wage growth broke above 3 percent even as consumer and business confidence stayed high. After starting with a whimper, October ended on a much better note, and the markets responded.

Strong fundamentals. Given the subsidence of some of the major worries, strong fundamentals started to reassert themselves. Corporate earnings growth, for example, was running at 22.5 percent, well above the expected (and already very strong) 19.3 percent. Markets responded by rallying from the depths of mid-October and then rallying even more strongly after the elections. Although important trend lines were broken in October, the subsequent rally took markets back up into expansion, suggesting that further gains might lie ahead.

A look ahead

Risks remain. Many of the risks that shook markets in October remain, with Europe in particular something to keep an eye on. With Brexit, Italy, and Germany all in play politically, the economic concerns remain substantial. Emerging markets have their own sets of risks, principally related to trade and the strong dollar, and China remains the poster child for these. Here in the U.S., even though the midterms have passed, politics remains a blood sport. The possibility of the new House investigating the White House could continue to rattle markets. Although these risks remain, however, they are also well established. None of this is news. Like the midterms, they may be resolved, which could have a positive effect on markets.

Less volatility. With all that said, where we are now is not that much different from where we have been for most of the year—which is not a bad place at all. October, at this point, looks more like a sudden break in confidence than anything more serious. With the corporate fundamentals very healthy and with the economy still expanding, chances are November will not see a repeat of last month’s volatility.

We will need to keep an eye on what might happen, of course, and last month did raise the risk levels overall. At this point, though, the signs are that November is likely to be both calmer and more positive than last month.

5 Ways to Affiliate
Commonwealth Independent Advisor

Hot Topics

Have a Question?

New Call-to-action

Conversations

Subscribe via E-mail

Subscribe

Disclosure

The information on this website is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

Certain sections of this commentary contain forward-looking statements that are based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets.

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. All indices are unmanaged and investors cannot invest directly into an index.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float‐adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the U.S. and Canada. The MSCI EAFE Index consists of 21 developed market country indices.  

Third party links are provided to you as a courtesy. We make no representation as to the completeness or accuracy of information provided at these websites. Information on such sites, including third party links contained within, should not be construed as an endorsement or adoption by Commonwealth of any kind. You should consult with a financial advisor regarding your specific situation.

Member FINRASIPC

Please review our Terms of Use

Commonwealth Financial Network®