The first reading of third-quarter GDP growth came in above expectations at 2.9%, the strongest growth rate in two years. Firmer exports and rebounds in inventories led the increase, while consumer spending also added to the total. The strong number leaves the door wide open for a Fed rate increase by the end of the year. The rate of U.S. job growth is slowing, as is typical in the second half of a business cycle, but weekly jobless claims remain low and the unemployment rate continues to hover around 5% - a number most economists consider “full” employment. Consumer spending remains strong, hitting a 3-month high in October—with more spending on experiences vs goods and services and more spending online vs in stores. Consumer sentiment has dipped recently, which is likely attributable to the uncertainty surrounding the upcoming election. The housing market continues to show an upward trend, albeit a choppy one. Weakness in the housing market is mostly related to supply issues. New home sales increased in September after declining in August, while pending home sales also rose. Manufacturing readings returned to expansionary territory after a brief contraction in August. Oil prices increased in October to their highest level since July of 2015, but subsequently fell over 10% once it became clear that OPEC production cuts are nowhere near certain. More clarity should come after the OPEC meeting at the end of November.
All of the major indices remain in positive territory YTD, though most of them were down in October. Small cap stocks, depicted by the Russell 2000 Index, led the way down with a 4.75% decline. The downturn was broad based with 9 of the eleven sectors in the S&P 500 finishing the month lower. Only Financials and Utilities managed positive returns. Though markets were down, volatility was lower than what might be expected in the month leading up to an election. International concerns continue to play a role in market returns, with weak Chinese export data and continued uncertainty on how Brexit will play out contributing to fears of a slowdown in global growth. Tempering these fears are relatively strong domestic corporate earnings reports, with 60% of S&P 500 companies reporting so far and 75% of those beating their average estimates.
Interest rates trended higher throughout the month as more data seems to support the possibility of a Fed rate hike by the end of the year. Core inflation is tracking around 1.7%, slightly below the Fed’s target of 2%. The probability of a rate hike by the end of the year stood at about 70% as of the end of October. The 10-year Treasury finished the month at 1.84%, a significant increase from 1.60% at the end of September, but still lower than beginning-of-year Treasury yields. High-yield corporate bonds continue their return dominance, up over 15% year-to-date, while also exhibiting immunity to the to the October sell off that negatively affected most other fixed income asset classes. Investment-grade corporate bonds are also showing strong year-to-date total returns while the municipal bond market is generally showing the weakest performance.