October turned out to be the best performing month on the market in 4 years. What did it and can it continue?
No! No suspense, just no! The S & P 500 expanded by more than 8% in the month of October. That kind of pace is not sustainable. The last time an October saw gains of this nature was in 2011 after the Debt ceiling caused a late summer swoon in the markets. After which the Markets oared back strongly in the 4th quarter.
This go around the markets rebounded from a slowdown in China that sent the markets into their first correction since 2012. What aided in the rebound?
- Corporate earnings
- The Federal Reserve
- Int’l Stimulus efforts
Corporate Earnings
A common trend during 2nd quarter earnings were forward guidance statements that indicated that earnings will be falling. As the 3rd quarter wore on economic data pointed to a soft production quarter as well. As a result, corporate earnings expectations for the 3rd quarter were meager, making them more attainable.
The Federal Reserve
In late September the Federal Reserve Board (FRB) announced that they would be leaving rates unchanged due to international concerns. This left monetary policy in a very loose state and as was expected the FRB also left rates unchanged for October. The next FRB meeting is in early December and as of right there is a 50/50 chance of a rate hike. More will be apparent as we have the October and November jobs reports as well as the revised 3rd quarter GDP numbers. Expect those revisions to lighten the performance currently reported (1.5% annualized[1]). Also, CPI data has not been causing reasons for concern either; which should continue to be the case as last year’s price drop in oil came in December. Expect likely FRB activity to come in Early 2016 at this point.
International Stimulus Efforts
The European Central Bank announced that it intends to increase their stimulus efforts by year end. Japan announced that they intend to continue efforts as they extend their forecast of a 2% inflation into 2017[2]. Lastly, coming full circle from the start of the correction, China announced measures to cut key interest rates and reserve requirements.
Conclusion
October has been a much better ride than September or August for that matter. I do think the 4th quarter does have continued opportunity, but not at the bounce back pace that we saw during the month of October.
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[1] www.investing.com – economic calendar
[2] www.mfs.com – week in review