The autumn months played their traditional roles again this year, as September was a down month for stocks and October appeared to be even worse. The S&P 500 managed to bottom out after losing 5% in October alone, but rallied back in the second half of the month to give investors some relief. Bonds did the opposite as the stock fears drove up bond prices in the first half of October and lost most of those gains as stocks rallied back. The Barclay’s Aggregate Bond index still managed a 1% gain on the month.
Most of the fear around the September and October mini-correction seems to have revolved around everything from Ebola to elections to monetary policy. Although Ebola has affected the lives of thousands in Western Africa, most developed nations appear to have protective systems in place. The outbreak and its toll on human life is a difficult thing to watch on the nightly news, but it doesn’t appear to be affecting the global economy and probably won’t have a significant impact on corporate earnings.
Our midterm elections saw Republicans gain majority control of the Senate. I don’t believe this will have a significant change on tax policy or government spending, and we probably won’t see any improved bipartisan communication. Monetary policy, however, has come to a crossroads. As expected, the Fed reported that they ended their quantitative easing last month, after first starting the bond-buying program six years ago. This came just a couple weeks before the Bureau of Labor Statistics reported unemployment dropping to 5.8% and the Bureau of Economic Analysis reported third quarter GDP growth of 3.5% in their “advance” estimate. Both figures continue to show we have come a long way since the 2008 financial crisis.
With unemployment and GDP growth in check, the final major component that the Fed tries to control is inflation. When they believe inflation is showing up in wage growth, we will most likely begin to see interest rates creeping up as well. However, inflation measures still post values below the historical averages as seen in the chart below. With local gas prices below $3/gallon for the first time in years, we can all appreciate that some areas of our personal budgets are seeing some relief.
Since the autumn months have played their roles, we can only hope the stock trend continues into the winter months. With many of the worries about the economy answered and the market resistance levels broken (then repaired), we could be in store for another leg up on the market. We have much to give thanks for this time of the year. Let us never forget how fortunate we are in a country based on freedoms and in an economy that continues to show improvement.
Index information is used to represent market performance, but you cannot invest directly in an index. Past performance is not indicative of future results.
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