October 2019 Market Review

-Darren Leavitt, CFA

Global risk assets were in favor during the month of October.  In October, investors continued to be hopeful that a trade deal between the US and China could be forged and also optimistic that a no-deal Brexit could be avoided.  Additionally, third-quarter earnings were on the margin better than expected, and global central banks continued to signal accommodation due to weak global manufacturing data and declines in consumer confidence.  Emerging markets led gains with an impressive 4.2% increase over the month.  Developed markets returned 2.6%.  International corporates returned 1.2%, while global government bonds posted gains of 0.5%.  Here in the US, the S&P 500 gained 2.04%, the Dow increased by 0.48%, the NASDAQ increased by 3.66%, and the Russell 2000 was up 2.57%.  The US Treasury curve steepened a bit over the month with the 2-year note yield declining ten basis points to 1.52% while the 10-year bond yield gained one basis point to 1.69%.  Despite safe-haven assets being out of favor, Gold rallied ~$41 over the month.  Oil was pretty much unchanged for the month, closing off a fraction at $54.18 a barrel.

Trade negotiations between the US and China produced a “Phase One” deal that avoided another tranche of tariffs levied on Chinese goods.  The proposal encouraged investors, but many remain skeptical that a comprehensive agreement can be negotiated.  “Phase One” requires the Chinese to purchase more US agricultural products, to open more access to their financial sector, and to agree on a more transparent currency market policy.  The partial agreement is scheduled to be signed in the next few weeks.

The avoidance of a non-deal Brexit helped market sentiment in October too.  The EU and Prime Minister Johnson came to an agreement, but it was unable to pass in Parliament. The reality of the situation is that another extension was provided by the EU so that the UK could try and form a government that could get the agreement passed.  UK elections are scheduled for December 12th, and the extension expires on January 31st 2020.  Stay tuned.

Surprise surprise third-quarter earnings have been on the margin better than expected and quite constructive for the markets.  Influential Tech companies like Apple, Microsoft, Google, and Facebook had better than expected results.  Financials, such as JP Morgan, Citi Bank, Morgan Stanley, and Bank of America, posted solid numbers as well.  Industrials Honeywell, United Rentals, and CSX also had solid results.  So far Earnings per share have grown 1% on a year over year basis, while Revenues have increased 4% over the same time frame.  For sure, there have been some results that have missed the mark- perhaps Amazon is a good example, but again results have mostly been better than expected.  That said, many companies have taken the opportunity to reduce expectations for next year’s earnings given the many uncertainties that are still looming.

Global central banks continue to provide stimulus.  Here in the US, the Federal Reserve cut its benchmark Fed Funds rate by 25 basis points in October, which was the third cut this year.  In Europe, the ECB kept its policy rate unchanged at -0.50% but did reiterate that their quantitative easing program, worth purchases of 20 billion euros monthly,  would begin in November.  In China, the PBOC continued to reduce reserve requirements on banks that are aimed to increase lending.  These initiatives stem from weaker global economic data.  Uncertainty on trade has been particularly hard on manufactures where the data suggest this critical part of the economy continues to contract.  Consumer confidence has also declined and is especially concerning given the consumer’s influence on the overall economy.  That said, most recent data suggest that these declines may be moderating as the pace of declines are less and or are, in fact, better than the prior month’s figures.

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