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Oct 2018 Market Recap: Stocks Slump Despite Solid Economic Results

October has often been considered one of the most volatile months for stocks – and this year was no exception.

Although recent economic measures have continued to reflect solid growth, the stock market experienced one of its worst months in years, with the S&P 500® dropping 6.94% in October. (The S&P 500 Index is a market-cap-weightedimage
      1 index that represents the average performance of a group of 500 large-capitalization stocks.)

The NASDAQ followed suit, dropping 9.20% for the month. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

International markets also tumbled in October, exacerbating an already-disappointing year. The MSCI EAFE Index, which tracks the performance of developed-economy stocks in Europe, Asia and Australia, dropped 8.03% in October, and is now down 11.49% for the year.

But while stocks have been slumping, the economy continues to yield some impressive results:

  • GDP growth at 3.5%. Gross domestic product (GDP) grew at a robust annualized rate of 3.5% in the third quarter, according to the advance estimate released by the Bureau of Economic Analysis on October 26. That followed a 4.2% increase in the second quarter.
  • Retail sales inch up. Retail sales edged up 0.1% in September, marking the fourth straight month of rising sales, according to the advance monthly retail sales report issued October 15 by the U.S. Department of Commerce. Sales are up 4.7% from a year earlier.
  • Job growth continues. U.S. employers added 134,000 new jobs in September, and the unemployment rate declined to 3.7%, according to the U.S. Bureau of Labor Statistics Employment Situation Report issued October 5. The economy has added jobs for 96 consecutive months. Over the past 12 months, average hourly earnings have increased by $.073, or 2.8%.
  • Income rising. Disposable personal income increased at an annualized rate of 4.1% in the third quarter, compared with a 4.5% increase in the second quarter, and real disposable personal income increased 2.5%, according to the October 26 Bureau of Economic Analysis report.
  • Manufacturing still strong. Economic activity in the manufacturing sector continued to expand in October, as the overall economy grew for the 114th consecutive month, according to the Institute for Supply Management (ISM) Report on Business issued November 1.
exhibit 1

But, in spite of the strong economic results, concerns over the Federal Reserve’s tightening monetary policy, rising interest rates, and international economic weaknesses contributed to the October stock market skid (Exhibit 1).

On the flip side, declining prices have made stocks relatively cheaper. The 12-month advanced price-earnings ratio for the S&P 500 has dropped to about 15.5 – down from a 2018 high of 18.5 on January 26, according to FactSet.

Drilling Down

U.S. Stocks Plunge

exhibit 2

The S&P 500 dropped 6.94% in October to finish the month at 2,711.74 after closing September at 2,913.98 (Exhibit 2). For the year, the S&P 500 is up only 1.43% after ending 2017 at 2,673.61.

The total return of the index (including dividends) was -6.84% in October. For the year, the total return of the S&P 500 was 3.01%.

The NASDAQ Index fell 9.20% for the month of October. Through the first 10 months of the year, the NASDAQ is up 5.83%. (The NASDAQ – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.)

Most Sectors Take a Dive

exhibit 3

Nine of the 11 sectors of the S&P 500 closed lower for October, with only the Consumer Staples and Utilities sectors making it into positive territory (Exhibit 3).

The biggest losers for the month included Consumer Discretionary, down 11.27%, Energy, down 11.26%, and Industrials down 10.81%.

The results this month reflect a sector realignment in which the former Telecommunications section has been replaced by a broader “Communication Services” sector. The newly renamed sector includes all of the previous Telecommunications sector companies, such as AT&T and Verizon, and adds a number of leading technology and communications companies, including Facebook, Alphabet (parent of Google), Twitter, Netflix, Walt Disney and Comcast, among others.

exhibit 4

Exhibit 3 shows the results of the 11 sectors for the past month.

Treasury Yields Keep Climbing

The yield on 10-year U.S. Treasuries moved up in October from 3.05% at the end of September to 3.15% at the October close (Exhibit 4). The yield is up 0.74% this year, after ending 2017 at 2.41%.

Oil Market Cools

exhibit 5

Oil prices took a nose dive in October, as the price of West Texas Intermediate dipped from $73.25 per barrel at the end of September to $65.31 at the end of October – a 10.84% decline (Exhibit 5). (West Texas Intermediate is a grade of crude oil used as a benchmark in oil pricing.)

International Equities Sink Further

The MSCI EAFE Index plunged 8.03% in October and is now down 11.49% for the year (Exhibit 6).

exhibit 6

What’s ahead for the economy and the markets? See November 2018 Market Outlook: What’s Behind Stock Market Volatility? by Mark Simenstad, Chief Investment Strategist

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