Market volatility returned with force in October, sending U.S. indices markedly lower. Many indices posted their worst monthly performance since May of 2010. Despite market volatility and negative monthly returns, the economy remains firmly supported by strong fundamentals and a confident consumer backdrop. U.S. GDP grew at an annual rate of 3.5% in the third quarter, which was down from the second quarter, but still indicative of strong overall growth. Manufacturing activity remains robust. The Institute for Supply Management’s Purchasing Managers Index registered at 57.7 in October, down from the September reading, yet signaling continued manufacturing growth. The employment picture is positive. Non-farm payrolls were up 250,000 jobs in October, besting estimates and holding the unemployment rate steady at 3.7%, the lowest since 1969. Indicative of a tight jobs market, average hourly earnings increased 3.1%, the best pace since 2009. The housing market continues to be one of the few areas of the economy that is showing some weakness. Total mortgage applications have decreased 16% year-to-date and new home sales have slowed. Tight housing supply continues to put upward pressure on prices. Escalating trade tensions continue to populate the headlines, most notably between the U.S. and China. The Trump administration continues to pursue additional tariffs on the remaining $257 billion of Chinese imports.
Fears that we have reached peak global growth with an ensuing slowdown near pushed equities significantly lower in October. Although all three major large-cap domestic indices remain positive for the year, October performance negated much of the previous 9-months of return. Technology stocks (NASDAQ) lost significant ground in October, but continue to lead the way year-do-date. Trade tensions continue to play a prominent role in slowdown fears, resulting in international benchmarks (MSCI EAFE and MSCI EM) significantly underperforming their domestic counterparts. Despite political and market volatility, third quarter corporate earnings may somewhat temper fears. With 3 out of 4 of companies reporting so far, almost 80% have beat analysts’ earnings estimates.
The 10-year U.S. Treasury yield breached 3.2% on multiple occasions in October, the highest level since 2011. As such, prices on intermediate and long-term government bonds ended October lower, pushing such bonds well into negative territory for the year. Corporate debt, both investment-grade and high-yield, lost over 1% for the month as credit spreads retreated in response to global growth concerns. Only high-yield corporate and short-term government debt remain in positive territory for the year. The Fed is expected to raise rates by 25 basis points one more time in 2018 to a range of 2.25%-2.50%. Investors will be focused on the Fed’s policy path in 2019 and any signs of changing in inflation expectations.