September and October are historically the two weakest months of the year, and markets did enter October in a nervous state. September ended on a positive note, but there was a drop that continued into the start of October. That decline took away all of the gains from the prior month and threatened to take the markets even lower. This move would have made sense, as the economic news was weakening. But markets went on to rebound and have a very good month. That reversal is the story of last month and very possibly of this one.
A look back
U.S. and international markets make gains. The Nasdaq Composite led the way, with a gain of 3.71 percent. The S&P 500 also did very well, up 2.17 percent. The Dow trailed, largely due to Boeing’s troubles, but still managed to gain 0.59 percent. By month-end, the S&P 500 had hit a new high, and the other two indices were getting close. International markets did even better, with developed markets up by 3.59 percent and emerging markets up 4.23 percent.
Fundamentals better than expected. Given the slowing economic data—and weak seasonal factors—this good news was a bit of a surprise. As data came out through the month, however, it became clear that the fundamentals were better than had been feared. Third-quarter economic growth, for example, came in at 1.9 percent. This result was down only slightly from the second quarter and well above the 1.6 percent expected. Job growth, which had been slowing, rebounded for October, with the report coming in much stronger than anticipated despite the GM strike. Consumer confidence stabilized, after a decline in previous months. Although the data remains somewhat soft, it is also positive. As I’ve said before, slow growth is still growth. Consumer spending remains the principal driver of the economy at the moment. With job growth healthy and confidence stabilizing, that spending is likely to continue.
Corporate fundamentals stabilize. Earnings were expected to decline by 4 percent for the past quarter. But with almost three-quarters of companies reporting, that decline is down to 2.7 percent. Of course, any decline is not good news. But the fact that it is smaller than expected is positive—and earnings are expected to resume growth in the fourth quarter. Again, we see stabilization after a weak period.
Policy moves support markets. Beyond the fact that growth looks likely to continue and that corporate earnings growth is likely to have bottomed, the economy and markets also had policy support. Brexit was postponed, and news of a possible settlement of the U.S.-China trade war buoyed markets. Plus, the Fed’s October rate cut gave a further tailwind to the economy. Given all of this, the positive market performance in October is less of a surprise and more of a harbinger that the rest of the year might be better than expected. Which is where we are at the start of November.
A look ahead
Positive trends likely to continue. As mentioned above, the jobs report came in much better than expected, and measures of business confidence both rebounded in a material way. Positive earnings surprises are also likely to further improve the corporate fundamentals. And the seasonal factors have turned from negative, for October, to positive, as markets tend to rally toward the end of the year. Early results show U.S. indices continuing to set new records, which is more evidence the trend is up (at least for the moment).
Risks remain. None of these factors guarantees a positive November at month-end, of course. More volatility is very possible, as risks remain. The biggest risk is the impeachment process, which could rattle markets, but further developments in the trade war could also reverse the trend. Even if we do get these kinds of shocks, however, the stabilization of the fundamentals, both economic and corporate, should provide a cushion to any volatility.
Overall, the prospect for November is less worrisome than where we started October. And that is not a bad place to be.