After spending much of August and September in the red, equity markets staged an impressive comeback in October. The three major U.S. averages each rallied more than 8% for the month and are now positive year-to-date, buoyed by stable third-quarter earnings reports and continued strength in housing and employment. The initial estimate for third-quarter GDP growth was reported during the last week of October at 1.5% - much lower than second-quarter growth of 3.9%. However, the headline number belies underlying strength in key areas such as consumer spending, which was up 2.2% following an increase of 2.4% in the previous quarter. The primary drag on third-quarter growth appears to be the large inventory build-up in the first half of the year, which created a third-quarter hit to GDP as inventory drawdown occurred. Most of the effect of this inventory buildup should be behind us and the U.S. economy is expected to remain on track for moderate expansion through the balance of the year. The Fed met in late October and once again left rates unchanged, though policy statement revisions are leading some to believe that the first rate increase in over nine years may come in December. The Fed removed a reference to market volatility and global events as possible U.S. headwinds and pointed to solid growth in consumer spending and improvements in housing. Bloomberg reported that traders increased the odds of a December rate hike to about 50% following the statement release.
After posting the worst quarterly performance in four years in the third quarter, the S&P 500 Index rebounded almost 8.5% in October. Likewise, The Dow Jones Industrial Average and the Nasdaq Composite were also up 8.6% and 9.4%, respectively. International developed & emerging markets indices also had strong performance, with each rallying over 7% for the month. The worst performing sectors of the market for the first three quarters, energy and materials, led the October rally with double-digit returns. Small capitalization stocks continue to lag their large cap counterparts both on a month-to-date & year-to -date basis, and value continues to underperform growth across all market caps. WTI crude oil ended the month at $46.59, up from a 2-month low due to a smaller than expected build in inventories.
The yield on the three-month Treasury fell to 0% for the first time ever in the first week of October as investors sought low-risk assets, pushing prices up and yields down. However, hawkish language coming out of the Fed meeting in late October triggered a sell-off in Treasuries which led to yields rebounding to the top end of their 52-week range. Despite increased volatility, yields remain fairly range-bound even as China and other global central banks sell Treasuries to cover their own capital needs. Treasury prices are being supported by investors attracted to the higher relative yields of U.S. government bonds compared to other sovereign debt. Also contributing to demand is the need for financial institutions to satisfy higher capital requirements through the purchase of Treasuries and other lower-risk bonds.