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October Recap: Markets Rebound After Rough Third Quarter

After declining 6.4% for the third quarter, the S&P 500 Index rebounded by more than 8% in October, pushing back into positive territory for the year. Markets around the world generally fared better as well, despite continuing concerns about slowing global growth and uncertainty surrounding the Federal Reserve’s pending decision to raise rates.

By the numbers

Market activity in October, as reflected in the most common market indexes we follow.

Equity Indexes*1-MonthYTD2014
Dow Jones Industrial Average1 8.6% 1.0% 10.0%
S&P 500® Index2 8.4% 2.7% 13.7%
Russell 2000® Index3 5.6% -2.5% 4.9%
MSCI EAFE Index4 7.8% 2.5% -4.5%
MSCI Emerging Markets Index5 7.1% -9.2% -1.8%
Bond Indexes*1-MonthYTD2014
Barclays U.S. Aggregate Bond Index6 0.0% 1.1% 6.0%
Barclays 20+ Year Treasury Index7 -0.5% -0.7% 27.5%
Barclays U.S. Corporate Investment Grade Index8 0.4% 0.3% 7.5%
Barclays U.S. High Yield Index9 2.8% 0.2% 2.5%
Barclays Municipal Bond Index10 0.4% 2.2% 9.1%
U.S. Treasury YieldsAs of
10/31/2015
As of
09/30/2015
As of
12/31/2014
3-Month U.S. Treasury Bill 0.08% 0.00% 0.04%
5-Year U.S. Treasury Bond 1.52% 1.37% 1.65%
10-Year U.S. Treasury Bond 2.16% 2.06% 2.17%
30-Year U.S. Treasury Bond 2.93% 2.87% 2.75%

 

Lack of bad news helps markets regain their footing

The market recovery in October suggests that investors think the factors that contributed to the third-quarter correction were a bit overplayed. While concerns over the Chinese economy persist, no new significant negative factors developed in recent weeks. The decline in Chinese stock markets didn’t spillover significantly into other markets and the support measures taken by the government seemed to have had some positive effects. Other emerging markets have shown signs of life, too, with the MSCI Emerging Market Index climbing more than 7% in October. Crude oil has rebounded some from its third-quarter lows, too, but is still well below the $60 per barrel levels last seen in June.

In the U.S., economic and fundamental reports have also been somewhat mixed, but calm enough to provide some breathing room for the market bounce-back. Corporate earnings have been declining, but not at the pace originally projected. With roughly two-thirds of companies in the S&P 500 reporting third-quarter earnings through the end of the month, 76% have beaten their estimates. The blended earnings rate is still -2.2%, but earlier projections were anticipating a 5.2% decline. Congress was also able to pass a two-year budget deal along with a suspension of the debt ceiling until March 2017, removing any immediate concerns over a potential government shutdown or a disastrous Treasury default. While the shutdown/debt ceiling debate hadn’t reached the fever pitch seen in previous cycles, markets now won’t be forced to endure the uncertainty that had surrounded that discussion in the past. The budget deal even boosted spending by a modest amount, counterbalancing previous fiscal austerity headwinds and, according to economists, likely adding up to 0.2% to future GDP growth rates, although the bipartisan compromise agreement did ultimately cost Rep. John Boehner his job as Speaker of the House.

Fed update: Market predictions evenly split over lift-off dates

The Federal Reserve decided to hold off on raising the federal funds rate yet again, but also slightly changed its language in the statement it released in October, using a more hawkish tone that increased the likelihood of a rate hike before the end of the year. The change in tone caused a modest increase in treasury rates, particularly in shorter maturity bonds. However, futures markets are still split almost evenly as to whether the Fed will raise rates at its December meeting or wait until 2016 to pull the trigger. Softer labor data and persistently low inflation rates, paired with monetary policy divergence (China, Japan, Europe and other central banks are planning to increase their quantitative easing methods while the U.S. is inching towards a significant tightening), has a lot of investors thinking the Fed is better off waiting until March 2016 or even later before lift-off.