October Market Commentary

US stocks touched new record highs in October driven by positive trade news, better than expected corporate earnings and encouraging economic news.  The US and China held trade talks in Washington during the month and President Trump announced the US and China had reached a “Phase One deal” on trade.  The US agreed to not implement tariffs set to go into effect in October and China will increase its purchases of US agricultural goods.  While earnings are set to decline for a third straight quarter, 75% of the 342 S&P 500 companies that have reported earnings to date have beaten expectations.  Economic news reflected a resilient US economy. Employers added 136,000 employees in September, slightly below expectations, but August and July hiring numbers were revised higher. The unemployment rate reached a half-century low of 3.5%.  US consumer sentiment rose in early October and US economic growth rose 1.9% in the third quarter, a slightly slower pace than the second quarter, but better than the 1.6% expected by economists.  On the downside, manufacturing contracted for a second straight month, auto sales fell 1.4% over the first nine months of the year and retail sales fell 0.3% for the first monthly decline since February.  In October, US stocks climbed 2.15% bringing the year to date performance to 22.68%.

Foreign stocks were again the top-performing asset class in October driven by supportive central banks and hopes over US/China trade discussions.  Purchasing manager surveys pointed to a continued slowdown in manufacturing activity in Europe and Asia. Eurozone investor confidence fell to a six-year low.  After the stimulus plans outlined at their September meeting, the European Central Bank elected to not make any policy changes at its October meeting.  However, three developed and nine emerging market countries central banks cut interest rates during the month.   China’s third-quarter GDP growth slowed to 6%, a 26 year low.  It’s at a low level of the range targeted by the Chinese government.  Negotiators from the UK and EU were able to reach a deal on the UK’s exit from the country bloc, however, the agreement has yet to pass Parliament.  As a result, EU leaders agreed to a three-month extension of the Brexit deadline to 1/31/20.  Emerging markets outpaced developed markets for the month, but trail over 2019.  Foreign stocks rose 3.59% in October and have surged 16.03% for the year to date.

Bonds gained over the month as interest rates held steady. Minutes from the Fed’s September meeting showed officials became increasingly concerned that slowing global growth could more significantly slow US hiring and economic activity.  They cited muted inflation, trade policy uncertainty and weak global growth for support on cutting their benchmark interest rate at that meeting.  At the Fed’s October meeting they elected to cut the Fed Funds Rate by 0.25% for the third time in as many meetings.  The Fed now targets a range of 1.5%-1.75% for its benchmark interest rate.  They also said that they would not reduce the rate further unless there was a clear deterioration of the economy.  The 10-year Treasury yield rose and then declined over the month to finish flat at 1.69%.  For the month, generally, shorter-term bonds outpaced longer-term bonds and credit bonds were the top-performing sectors.  The broad bond market rose 0.30% in October and is up 8.85% for the year to date.