Investors have plenty to be optimistic about as the U.S economy continued to post strong, albeit decreasingly robust, data throughout the month. However, it was a potential breakthrough in negotiations with China and the belief that the Fed easing cycle may be concluding that brought stability and positive sentiment to financial markets in October. With employment staying at near-record levels and a willingness to spend, consumers remain the linchpin of economic growth and stability. Unemployment levels for October were reported at 3.6%, just slightly off September’s 3.5%. In addition to the overall rate, job growth and labor force participation continue at a robust pace. Annualized GDP growth slowed to 1.9% during the third quarter, down from 2.0%, but stronger than the 1.6% anticipated by investors. Additionally, inflation remains benign in both the consumer and producer sectors. The resumption of trade negotiations with China in mid-October and suspension of some upcoming planned tariffs lifted market spirits, as did the announcement of reaching a “phase one deal” that would increase agricultural purchases and address intellectual property theft. Markets will now have to wait and see whether this agreement can make it to the signature phase before setting their sights on further negotiations. Finally, as anticipated, the Federal Reserve lowered the Fed Funds target rate by 25 basis points, setting the range to the present 1.50% to 1.75%, and confirming their comfort with this range for the near future.
Despite being known for the worst moments in stock market history, October has historically been a solid, but not spectacular, month for equity returns. With positive returns produced by all major indices, this month followed that trend. Bolstered by improved sentiment that a trade resolution with China is nearing and continued strong, albeit slowing, growth in the domestic economy, market participants continued their bullish pursuit of equities. Domestically, technology was again a leading gainer and was joined, somewhat surprisingly, by the health care segment, which reacted to positive news in both earnings and new drug development. Foreign indices provided strong returns, as investor’s appetite for risk increased with the positive opinions on a potential trade resolution.
Anticipation that the Fed would again lower rates in October, combined with an expected pause in the easing cycle afterward, led bond investors to price a more “normal” rate structure into the market. Subsequently, the yield curve steepened throughout the month of October, leading yields slightly higher and prices lower on longer bonds. Short rates fell in symphony with expected lowering of the Fed Funds rate. Simultaneously, the increased appetite for risk seen in the equity market carried over to bonds and drove indices containing spread product to outperform their safer, Treasury laden counterparts. This push toward risk helped the Corporate bond market to lead performance during October despite being comprised of longer dated maturities.