More tricks than treats for markets in October
October was a challenging month for markets. The strong start to the month was offset by rising COVID-19 case counts, which led to a sell-off at month-end. The S&P 500 lost 2.66 percent in October, while the Nasdaq Composite declined by 2.26 percent. The Dow Jones Industrials Average (DJIA) suffered the largest decline, losing 4.52 percent.
This volatility came despite improving fundamentals during the month. According to Bloomberg Intelligence, as of October 30 with 63 percent of companies having reported results, the blended third-quarter earnings decline for the S&P 500 sits at 10.7 percent. If earnings end the quarter at this level, it would be a much better result than the roughly 31 percent decline we saw in the second quarter.
Technical factors were also supportive during the month, but there are signs that markets are approaching potential danger levels. All three major indices remained above their respective 200-day moving averages. The sell-off near month-end brought the DJIA close to this important technical level, however.
Internationally, the story was much the same. The MSCI EAFE Index declined by 3.99 percent during the month. MSCI Emerging Markets Index, on the other hand, returned a positive 2.08 percent. Technicals for international stocks were mixed. The MSCI EAFE Index ended the month below its 200-day moving average for the first time in three months. The MSCI Emerging Markets Index remained well above its trend line.
Fixed income had a challenging month, as rising long-term interest rates weighed on investor sentiment. The 10-year U.S. Treasury yield rose from 0.68 percent at the start of the month to 0.88 percent at month-end. The Bloomberg Barclays U.S. Aggregate Bond Index lost 0.45 percent in October. High-yield fixed income, which is less tied to movements in interest rates, had a positive month. The Bloomberg Barclays U.S. Corporate High Yield Index gained 0.51 percent. High-yield spreads declined during the month, indicating rising investor tolerance for lower yields.
Worsening public health outlook rocks markets
Increasing medical risks created uncertainty and led to a rise in volatility. The number of new daily cases grew throughout October and finished the period at a new high. We ended the month with a seven-day average of more than 81,000 new cases per day, notably higher than July’s peak of approximately 69,000.
We continued to see an increase in the number of daily tests, but the positive test rate also rose. This is a sign that we are still falling behind in containing the recent surge in cases. We ended the month with a seven-day average positive test rate of 6.5 percent, which is above the World Health Organization’s 5 percent maximum target positive test rate.
Economy shows resilience during uncertain month
We can thank the continued economic recovery for blunting some of the negative effects of rising medical risks. Notable highlights include consumer sentiment and spending, which showcased the continued strength of the American consumer. Retail sales rose by 1.9 percent in September against calls for a 0.8 percent increase. Personal income and spending also beat expectations, and the pace of weekly layoffs improved as well.
Business confidence, as measured by the Institute for Supply Management Composite index, rose in September to its second-highest level since the pandemic hit. Durable goods orders rose by more than expected, signaling strong business spending during the month.
Home builder confidence set a new high in October, largely due to low mortgage rates and falling timber prices. The record-low mortgage rates continue to drive prospective homebuyers into the market. As you can see in Figure 1, the pace of existing home sales rose to its highest level since 2006 in September.
Figure 1. Existing Home Sales, September 2000–Present
Risks rising despite economic recovery
Despite the continued economic improvement, we saw in October, the worsening public health picture indicates risks are rising. Any good news on the economic front may ease some of the negative impact and market turbulence caused by these growing risks. A well-diversified portfolio that matches investor goals and timelines remains the best path forward for most. If concerns remain, however, please contact us to review your financial plans.
All information according to Bloomberg, unless stated otherwise.
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. All indices are unmanaged and investors cannot invest directly into an index. The Dow Jones Industrial Average is a price-weighted average of 30 actively traded blue-chip stocks. The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Nasdaq Composite Index measures the performance of all issues listed in the Nasdaq Stock Market, except for rights, warrants, units, and convertible debentures. The MSCI EAFE Index is a float-adjusted market capitalization index designed to measure developed market equity performance, excluding the U.S. and Canada. The MSCI Emerging Markets Index is a market capitalization-weighted index composed of companies representative of the market structure of 26 emerging market countries in Europe, Latin America, and the Pacific Basin. It excludes closed markets and those shares in otherwise free markets that are not purchasable by foreigners. The Bloomberg Barclays Aggregate Bond Index is an unmanaged market value-weighted index representing securities that are SEC-registered, taxable, and dollar-denominated. It covers the U.S. investment-grade fixed-rate bond market, with index components for a combination of the Bloomberg Barclays government and corporate securities, mortgage-backed pass-through securities, and asset-backed securities. The Bloomberg Barclays U.S. Corporate High Yield Index covers the USD-denominated, non-investment-grade, fixed-rate, taxable corporate bond market. Securities are classified as high-yield if the middle rating of Moody’s, Fitch, and S&P is Ba1/BB+/BB+ or below. Authored by Brad McMillan, CFA®, CAIA, MAI, managing principal, chief investment officer, and Sam Millette, senior investment research analyst, at Commonwealth Financial Network®. © 2020 Commonwealth Financial Network®
