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Wall Street to Your Street


October 2016 Market Recap: Holding On For Election Day

Octobers have been known for some monumental market meltdowns. Most notable among them are the Crash of 1929, Black Monday in 1987, and October 15, 2008, when the Dow Jones Industrial Average plunged 733 points (7.9%), signaling the start of the Great Recession.

voting boxesFortunately, there was no market crash this October, although we did see a 1.94% drop in the S&P 500 for the month. Job growth continued (albeit at a slower rate than most months this year), the Fed held off on raising interest rates, and the price of oil fluttered around the $50-per-barrel range through most of the month before dropping by about $4 in the final week while OPEC continued to haggle over a production limitation agreement.

In other words, it was business as usual on Wall Street!

But lurking in the background like an elephant in the room was the 2016 U.S. presidential election. Although presidential elections always seem compelling, controversial, historic and at times, bitter and divisive, this one has been all of the above and morelike a show we are all watching and participating in at the same time.

Regardless of the winner, this election will have historic implications. If elected, one candidate would become the first woman president while the other – a businessman – would become the first president since General Dwight D. Eisenhower in 1952 to enter the office with no previous elected experience. At age 70, he would also be the oldest new president ever to enter the office, while his 69-year-old opponent would be the second oldest. How the election of either candidate will affect the markets and the economy remains to be seen.

There are a few trends from past elections that may give us insight on what to expect from the market in the weeks after the election, noting – of course –that past performance may not be viewed as an indication of future results.

Over the past 64 years, the market has been kindest to incumbents who are reelected. Each time an incumbent president was reelected during that period, the S&P 500 has moved up between November 1 and year-end. That includes Presidents Eisenhower, Johnson, Nixon, Reagan, Clinton, George W. Bush and Obama.

The markets have also done well when new presidents have been elected, except during times of crisis. Market rose during that period following the first-term elections of Eisenhower, Kennedy, Nixon, Carter, George H.W. Bush and Clinton, but decreased after the first-term elections of Reagan, George W. Bush and Obama.

in a nutshellReagan was elected during a tough economic crisis in 1980, while Obama won his first election in 2008 during the Global Financial Crisis. George W. Bush won the election in 2000, but the outcome remained in limbo for weeks as votes in Florida were recounted. The election was finally decided by a Supreme Court ruling December 12, five weeks after the election. The next day, Bush’s opponent, Al Gore, conceded and accepted the election of Bush as the 43rd U.S. President. While you may have expected some relief on Wall Street once the election was settled, the S&P 500 actually dropped 2.8% through the final 2½ weeks of 2000.

Although the election polls in this year’s campaign have fluctuated widely –and their validity has often been challenged – there has been one constant: The polls show strong majority support for the candidate representing each respective party. And, regardless of who wins the 2016 election, it could all begin again in just three years. Can you say “sequel?” Stay tuned.

Drilling down

Stock slip

exhibit 2After two months with very little fluctuation in the S&P 500, the market dropped 1.94% in October, from 2168.27 to 2126.15. The S&P is still up 4.02% through the first 10 months of 2016 (Exhibit 2).

Gross Domestic Product (GDP) Growth Spurt

U.S. GDP grew at an annualized rate of 2.9% in the third quarter of 2016, according to the "advance" estimate released by the U.S. Department of Commerce, Bureau of Economic Analysis (BEA) on October 28. That was a significant jump from the second quarter, when GDP grew by 1.4%.

The BEA attributed the strong growth to “positive contributions from personal consumption expenditures, an upturn in private inventory investment, an acceleration in exports, a smaller decrease in state and local government spending, and an upturn in federal government spending.”

In its report, the Commerce Department noted that “current-dollar personal income increased $153.6 billion in the third quarter, compared with an increase of $153.1 billion in the second, while disposable personal income increased $125.3 billion, or 3.6%, in the third quarter, compared with an increase of $140.6 billion, or 4.1%, in the second. Real disposable personal income increased 2.2%, compared with an increase of 2.1% in the second quarter.”

Retail Sales Strengthen

After a tepid U.S. Census Bureau retail sales report showed a 0.3% monthly decline in retail sales in August, a new report issued October 14 showed sales in September were up 0.6% from the previous month and up 2.7% year-over-year.

While we expect very little growth in year-over-year sales for mall-based retailers this holiday season, online sales continue to flourish. Online sales were up 15.8% from a year ago through the second quarter, according to the U.S. Department of Commerce, and accounted for 8.1% of all retail sales through the first two quarters versus 7.5% a year earlier. In all, retail sales (including food services), were up 2.9% year-over-year through the first nine months of 2016. (See: Online Sales Filling Santa’s Sleigh This Year.)

Jobs still moving up

Job growth slowed somewhat in August and September compared to most months this year, but still showed an increase. According to the U.S. Department of Labor employment report issued October 7, U.S. employers added 156,000 new nonfarm jobs in September, following a gain of 167,000 new jobs in August.  

We believe the decline in monthly job growth is a natural result of the drop in the unemployment rate from 10% to about 5% over the past few years. At 5% – which was the rate reported in September – the economy is nearing full employment (which the Fed defines as about 4.8%).

Job growth typically trends toward the growth rate of the working-age population, but not at twice the rate of population growth, which is what we experienced over the past few years of the recovery. Now that we are at a higher employment level, the important metric to watch is wage growth. While employment growth only affects the new jobholders, wage growth affects all 135 million Americans with jobs. (See: Job Growth Slow in September for Second Straight Month.)

Sector returns

exhibit 3Most sectors have followed the general downward trend of the market this month, with a couple of exceptions. The S&P Financial Index was up 2.30% after trailing the averages last month in the wake of the Wells Fargo scandal. The only other sector in positive territory last month was utilities, up 0.87%.

After a strong month in September, the S&P energy sector stumbled again in October, down 2.91%. The other leading losers included health care, down 6.53%, and telecom services, down 6.47%.

Standard & Poor’s recently added a new sector, real estate, which had been part of the financial sector previously. Real estate was one of the worst performing sectors, dropping 6.47% for the month.

Exhibit 3 details the monthly, quarterly and year-to-date performance of each of the 11 S&P 500 sectors:

Bond market: Still no rate hike

exhibit 4The Fed once again left interest rates unchanged in October as the economy continued its slow growth mode. The Fed has not raised rates since December 2015. The latest GDP report showing growth of 2.9% for the third quarter may help spur the Fed to raise rates after the election. (See: Where's that Fed Hike?)

Interest rates continued to move up, ending the month at 1.82% on 10-year U.S. Treasuries – well above the all-time low of 1.36% on July 8, 2016. (Exhibit 4). (See: Where to Find Income.)

Dollar rises versus Euro and Yen

exhibit 5The dollar strengthened against both the Euro (by 2.46%) and the Yen (by 3.77%) during the month of October (Exhibit 5).

Oil prices drop

Oil prices took a last minute dive the final two days of the month to end October down 2.86%, from $48.24 per barrel on September 30 to $46.86 on October 31 (Exhibit 6). OPEC has continued to work toward a production limitation agreement designed to bring the supply of oil more in line with the demand

Global market

exhibit 6Similar to the U.S. stock market, the global equity markets retreated in October. After closing September 30 at 1701.69, the MSCI EAFE Index dropped to 1665.72 on October 31 – a 2.11% decline for the month (Exhibit 7). The MSCI EAFE is down 2.95% for the year.

CIO Outlook - Russell Swansen

What’s ahead for the economy and the markets? Here’s our assessment:


exhibit 7We continue to be concerned about sub-par corporate earnings and weak manufacturing output levels. The financial sector has also continued to struggle with lower margins due to low interest rates, higher regulatory costs and declining corporate banking activity. Some banks and financial institutions also face the prospect of delinquencies and defaults in the oil production sector as oil prices continue to struggle.

Although oil prices moved up slightly over the past month, the energy sector is still well short of a full recovery. However, strong GDP growth in the third quarter could persuade the Fed to raise interest rates in November or December. While a small rate hike could serve to strengthen the U.S. dollar –which could inhibit the competitiveness of U.S. exporters – we believe that a small rate hike would help net savers without adversely affecting the housing market or consumer spending.


After two disappointing months, retail sales surged in October, up 0.6% month-over-month and 2.9% year-over-year, according to the U.S. Commerce Department. Historically, consumption accounts for about two-thirds of the U.S. economy – and has been the singular area of strength in the recovery so far, as manufacturing lagged. A strengthening in the consumer sector could help propel the economy to stronger growth moving forward.

New GDP growth figures showing real growth of 2.9% annualized in the third quarter also may provide a ray of hope that the economy is bouncing back. However, while the growth rate seems robust on the surface, the underlying details were not as strong. Net trade added 0.8%, but that was driven by the huge surge in soybean exports due to a drought in South America. In addition, an inventory build-up added 0.6%. Neither development is considered to be sustainable.

Domestic final sales (GDP less inventories and trade) were much weaker at +1.4%. We consider that figure to be a better indicator of the underlying strength of the economy on an ongoing basis.

Although job growth slowed the past two months, the unemployment rate is still hovering at about 5%, which is considered to be close to full employment. This slow-down in monthly job gains is a natural trend as the economy nears full employment. However, we still see some weakness in the jobs picture. Although the labor force participation rate for those in their prime working years (25-54 year olds) moved up to its highest level since 2012 at 81.7% in September, it is still about 1.5 percentage points below the pre-recession level. 

While wage growth of 2.6% this year through September is encouraging, if wages continue to climb at a strong rate, that could impact corporate profit margins, which could become a headwind over the next 12 to 18 months.


With Election Day next week, we believe much of the impact of a new president is already priced into the market. Although neither candidate would receive high marks in terms of their perceived ability to drive the economy, we believe that a president’s influence on the economy is typically fairly modest.

It is Congress that controls fiscal policy and the budget, so either of this year’s leading candidates would likely face resistance from Congress – and perhaps gridlock – if they were to push for any substantive fiscal policy changes.

From an economic perspective, the stronger-than-expected GDP growth in the third quarter could bode well for the stock market going forward, although, as noted, the underlying details were not as impressive. As a result, we still anticipate a GDP growth rate of only about 1.5% for all of 2016, which is lower than the historic average.

Globally, over the next 12 months, we believe that China will have GDP growth of about 6%, Japan will have flat or negative growth, and Europe will have growth of about 1.6%. Actual reported annualized GDP growth through the second quarter of 2016 was 6.7% for China, 0.8% for Japan and 1.6% for Europe.

In the U.S., despite weak corporate earnings growth and sluggish consumer spending, the economy has avoided recession so far, and we are not projecting a recession in the near term. We expect modest growth with a somewhat elevated risk of recession sometime in the next 12 months if job growth slows and consumer spending ebbs.

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