October 2019 Market Commentary

Global markets advanced during October as optimism fueled by a third Fed rate cut and progressing US-China trade talks outpaced concerns over US manufacturing levels. The Russell 3000 Index, one of the broadest measures of US stock market performance, advanced +2.2% on the month and is up +22.7% year-to-date. International stocks outpaced their domestic counterparts in October with a +3.5% monthly gain per the MSCI ACWI ex-US Index, which is up +15.5% YTD. Overseas gains were driven by strength in Europe as the likelihood of a “no-deal Brexit” continues to diminish.

Within fixed income, bonds produced modest gains for the month, with the Bloomberg Barclays US Aggregate Bond Index gaining +0.3% in October for a return of +8.9% so far in 2019. 10-year Treasury yields were unchanged on the month, while the curve steepened as short-term rates fell with the Federal Reserve’s most recent quarter-point rate cut. The target Fed Funds rate now stands at a range between 1.5% and 1.75%, with Fed Chairman Jerome Powell indicating that future cuts were not indicated based on the current global economic outlook. Gold prices continued their strong showing for 2019, advancing +1.7% on the month for a +18.1% gain YTD. A balanced portfolio, comprised of 60% in global equities and 40% in fixed income, would have gained +1.7% in October for a full-year gain of +15.9%.

While headlines have started to turn positive, memories of last year’s steep fourth-quarter decline are not far from investors’ minds. As always, we seek to filter the news and noise through the lens of our proprietary Three Dials methodology, all of which are unchanged from last month:                                                                                     

1. Market Sentiment and Momentum: Positive

Large-cap US equity indexes continue to barrel toward new all-time highs, while small-caps and international equities lag behind. On balance, a broad-based rally appears to be in place across global markets, which leaves our Momentum Dial in a “Positive” reading for the time being.

2. Economic Fundamentals: Positive

The first look at third quarter US GDP came in above expectations at +1.9% annualized growth, with strong consumer spending continuing to offset weakness in manufacturing. On the earnings front, with roughly half of S&P companies having reported Q3 results, 80% are beating profit expectations, indicating that the expected earnings decline may not be as severe as initially feared. All things considered, our Fundamental Dial remains in a “Positive” position through the end of October.

3. Valuation: Negative 

While corporate earnings have stalled, equity prices continue to rise, which has exasperated the problem of already stretched valuations. Société Générale global strategist Albert Edwards noted recently that the ratio of stock prices to national pre-tax profits now matches that of the tech bubble of the early 2000’s, an ominous comparison for today’s markets. A such, our Valuation Dial remains in a “Negative” position.

On balance, our Three Dials composite reading takes a “Cautiously Optimistic” stance heading into the final two months of the year.

Sources:

https://www.npr.org/2019/10/28/774031088/rain-chexit-european-union-grants-brexit-delay-to-u-k-again

https://www.wsj.com/articles/fed-cuts-rates-by-quarter-point-11572458556

https://www.cnbc.com/2019/10/30/us-gdp-q3-2019-first-reading.html

https://www.factset.com/hubfs/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_102519.pdf

https://www.barrons.com/articles/dow-jones-industrial-average-rises-amid-china-optimism-earnings-and-looming-fomc-meeting-51572262484