It’s time for my kids to go out and get me… I mean, themselves some candy.  My 2nd favorite holiday gets underway with the stock market giving us a pre-Halloween treat or is it merely a trick and the correction will continue?

The reason for the question is that the market move earlier this month, while quick and deep, was not as deep as expected.  Many clients probably took a deep sigh of relief as their account values have been returning and I’m happy for them, however a periodic correction is a natural part of the process.  It allows for stock values not to become irrationally bloated.  It never actually reached true correction territory (-10%), only reaching -8.2% at its deepest (pseudo-correction).

This recent resurgence, while justified by the data released last week almost seemed like premature exuberance.  In reviewing some of the data that led to the weeks returns perhaps conclusions can be drawn.

Housing Data

The recent pseudo-correction caused interest rates on the 10 year treasury to dip as low as 1.87% and that made mortgages more affordable.  As a result we saw an uptick in refinancing activity.  In November we should see a slight strengthening of sales and home values.  Recent rate activity probably moved some buyers off the fence, increasing sales, and there was likely less negotiation on price as buyers got a kick back from reduced rates on monthly mortgage costs, elevating values.

New and existing homes sales both surprised to the plus side.  New home sales were expected to contract by -5.8% month over month and they actually grew by 0.2%.  Existing home sales, which represent 90% of the market were expected to grow by 1.0% month over month and actually grew by 2.4%[1].  Strong sales ahead of the rate changes may spell a strong off season for residential real estate.

PMI Data

European PMI data increased, while only by 0.2[2] it still increased, something Europe desperately needs.  German PMI increased while France’s PMI fell.  The threat of a recession in Europe still looms, however PMI data in excess of 50 indicates an economy that is expanding, which gives a brief respite from recessionary concerns.

Inflation Data

Core consumer prices remained flat at 1.7% year over year through September[3].  The continued subdued inflationary environment allows the Federal Reserve Board to focus on unemployment without worrying about run-away inflation.

While a market correction is typically -10% or more one thing is certain.  We have not seen a correction deeper than -8.2% since the Federal Reserve Board (FRB) announced their taper program in May of 2012.  One possibility is the bi-polar behavior investors have shown during this period.  Negative economic data prompts market gains and strong economic data prompts losses.  This behavior may be holding values more in check and as a result making the typical -10% not as necessary.  -7% may be the new typical during Taper; which by the way should be ending shortly, so back to 10% here on out…

Maybe 

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Always remember that while this is a week in review, this does not trigger or relate to trading activity on your account with Financial Future Services.  Broad diversification across several asset classes with a long term holding strategy is the best strategy in any market environment.

Any and all third-party posts or responses to this blog do not reflect the views of the firm and have not been reviewed by the firm for completeness or accuracy.

[1] www.investing.com

[2] www.mfs.com

[3] www.investing.com