October 2018 Market Update

Published on November 8, 2018 | Posted in Tips & Updates

Stocks retreated significantly in October. Technology and small-caps faced the greatest struggles, down 9.20% and 10.91% as measured by the NASDAQ and Russell 2000 Indexes, respectively. The S&P 500 Index fell 6.94%, which wiped out most of the year’s gain to-date, only holding onto a modest 1.43% rise from January 1st. Internet stocks precipitated much of the early stages of this equity sell-off, and were augmented by investor concerns about slowing global economic growth which heightened volatility during the month. More worries came as interest rates began to rise and put concerns in investor’s minds about rising cost of corporate credit. This, coupled with high analyst estimates for corporate earnings, caused many stocks to dip out of fear that economic growth may be slowing down. Further uncertainty in the markets was due to the pending outcome of the US mid-term elections and the potential impact it may have on both fiscal and monetary policy. In total, global stock and bond markets lost an eye popping amount of approximately $5 trillion in value over October. As such, we turn closely to the economic fundamentals for an explanation.

Total nonfarm payroll employment rose by 250,000 in October and the unemployment rate held steady at 3.7% according to the Bureau of Labor Statistics. Gains were most prevalent in health care, manufacturing, construction and transportation. In general, the unemployment rate remains at historic lows as the level of economic activity across the country remains high. This is supported by initial estimates for third-quarter Gross Domestic Product (GDP) growth released by the Bureau of Economic Analysis, which indicate the economy rose at an annualized pace of 3.5%. Consumer confidence as measured by The Conference Board Index also rose in October, following a healthy rise in September. This boost in sentiment is driven by current business and labor market conditions. A slowdown in new home sales, which fell 5.5% in September and are off 13.2% from the same time last year, is one key negative that our economy is facing. For many, the slowdown is a function of rising interest rates which is also causing a slowdown in refinance activity which may weigh on financial stocks in the months to come. In summary, the market slowdown in October does not seem to be supported by deteriorating economic fundamentals, but is more a product of sheer volatility and investor behavior.

We saw interest rates rise in October, with the 10-year US Treasury yield up 8 basis points to 3.14% as of October 31st. Markets are already bracing for the Federal Open Market Committee to implement an additional 25 basis point rate increase in December with three rate hikes planned for 2019. In our view, these rate hikes are being communicated and implemented in a gradual fashion with the intent to not cause any market disruptions. As such, equity investors should not have reason to fear a return to normalized interest rates.

As of this writing, we have seen that the mid-term elections had a moderating effect on October’s market correction and stock prices rebounded in a noticeable way. For the rest of November, we expect the economy to remain in good health and most macroeconomic trends to remain stable. As we gear up for next month’s FOMC meeting, volatility could resume, but due to the rise in rates coming as a result of a strong economy, we see no reason for alarm or immediate action. During uncertain times like these, we want to remind our valued clients that our doors are always open. We encourage you to reach out to one of our investment professionals if you have questions about the impact of these factors on your portfolio or situation. Thank you for choosing Superior National Bank & Trust for your financial services needs.