October 2015 Market Commentary

If we’re not out the woods, October was certainly a very large clearing that we came upon. The S&P 500 posted its fifth consecutive weekly gains with almost all major stock indices returning very strong figures in October to counterbalance – both August and September and bring us very close to where we were on July 31st.

Within the US stock market, we’ve seen earnings growth accelerating – with two thirds of companies reporting results, Q3 earnings are on pace for an increase of 7% (though with Energy stocks, it’s on pace for a 1% decline!). Moreover, during the rally, we have seen a notable change in market leadership. Momentum stocks lead the way in September, which turned from growth to value stocks in October. While all this is positive and likely increasing investor sentiment, frustration does remain high. Specifically, investors appear uneasy after the recent sharp sell-off that drove the S&P 500 down 12% over nine trading days in August, with some areas of the market (such as biotech) falling even more. The sharp back-and-forth since that time has also contributed to unease.

Domestically, there still is good news, especially with third quarter economic growth. Most of the street is forecasting a 2-2.5% growth, with continued strong consumer spending pushing the economy forward. Even better, we do expect a modest rise in inflation next year due to a stronger economy and tighter labor market. Notably, core CPI rose 1.9% in September, its highest level since July 2014!

The U.S. consumer remains relatively strong, and should be an important driver of economic growth. Most folks on the street expect retail sales to increase by 4% or more in the third quarter, with strength coming from auto and restaurant sales, building and materials, and e-commerce. The combination of labor market gains and stronger real personal and family incomes should continue to support the U.S. consumer in the coming quarters.

Within Congress, the budget deal should contribute to economic growth and stability. The two year deal to raise the debt ceiling and increase federal spending marks the end of a multi-year period of budget austerity. We expect the increase in spending should contribute marginally 0.1% to 0.2% to U.S. growth over the next year.

Finally, the possibility of a December rate increase appears to be growing. In the statement that accompanied the Fed’s meeting, the central bank shifted the theme of its message from maintaining low rates to possibly raising them. The Fed also explicitly mentioned the "next meeting" in December as a time of possible action. Equities dipped and then recovered following the news, which we think is a good sign that investors are prepared for higher rates.

Internationally, there has been a fair amount of activity. China has engaged in yet another interest rate cut in an attempt to stimulate their growth. The European Central Bank has also indicated it may engage in additional easing measures by adopting an extremely dovish tone at its policy meeting last week, providing a strong tailwind for risk assets (equities and lower quality bonds).

All this said, the macro outlook remains uncertain, but we think the long-term prospects for global economic growth remain reasonably good. Central banks remain focused on promoting growth, and most parts of the U.S. economy are doing well (particularly the consumer sector). Decoupling will likely persist, with the United States continuing to exhibit stronger growth compared to most of the rest of the world.

Over the past month, global equities have rallied strongly, largely due to signs of stabilization in China and signals from central banks around the world that policy will remain broadly accommodative. Looking ahead, we think these trends should continue to provide tailwinds for equity prices, but we acknowledge that global economic growth must strengthen for both corporate earnings and equity prices to improve. We expect global corporate profit levels to advance, but possibly not until next year when the negative effects of the rising U.S. dollar and falling oil prices have faded.

Shifting gears, I’d like to talk about what’s behind the recent rally, especially as strong as it was and following an ugly August and September. Notably, The S&P 500 Index has now recovered all of the ground it lost since the mid- August crash. The market recovery is somewhat surprising since the overall economic backdrop has not really changed over the past few months. Concerns remain over Chinese growth and falling commodity prices (which helped precipitate the rout). More broadly, trends in global economic conditions remain relatively static. The developed world looks to be improving, especially in the United States and Europe where consumer spending levels are rising. Emerging markets growth looks more mixed. China’s economy is clearly slowing, and we think it is decelerating to approximately 5%. This would be a negative for commodity-exporting emerging economies but a positive for those that import commodities.

So what has been driving the equity rally of recent weeks? We would point to some signs of stabilization and additional policy action in China, possible easing in other regions, the delay in rate increases from the Federal Reserve, a lack of negative noise from Washington, healthy bank credit levels, a resumption of merger-and-acquisition activity and positive surprises from corporate earnings. 

Fixed Income Analysis

On the month, the Barclays Aggregate total return was down 37 basis points, while the Barclays US High Yield Index was up 2.75%, a very clear sign that investors were looking for riskier assets, especially with all the news emerging about various central banks looking to keep rates low and try to stimulate the economy. Fortunately, the High Yield index is finally no longer negative on the year, up 23 basis points. While investment grade bonds have fared better, with the Barclays Aggregate up 1.42% on the year, both are experiencing very mild standard deviations on the year at 4% and 6.1% (for the Barclays Agg and the US High Yield index, respectively).  

Stock Analysis

On the month, the global stock market finally was in a good mood. This good mood was prevalent no just in the US, with the S&P 500 up 8.3%, but internationally with the MSCI ACWI index up 7.45%! When digging deeper, not too much more emerges, with the exception that the vast majority of the strong month domestically was among the Large Cap names, while both Mid Cap and Small Cap stocks returned in the 5% range (Russell 2000 Index at 5.5%, S&P 400 MidCap at 5.54%). However, the good news with Large Cap stocks doing well, is that finally the more conservative Dividend paying stocks had a very good month. Notably, the DJ US Dividend Index was up 8.50%, however it is still down 2.5% on the year!



The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of David Abuaf and not necessarily those of RJFS or Raymond James.


The S&P 500 is an unmanaged index of 500 widely held stocks. Dow Jones Industrial Average (DJIA), commonly known as “The Dow” is an index representing 30 stock of companies maintained and reviewed by the editors of the Wall Street Journal. NASDAQ composite is an unmanaged index of securities traded on the NASDAQ system. Inclusion of these indexes is for illustrative purposes only. Keep in mind that individuals cannot invest directly in any index, and index performance does not include transaction costs or other fees, which will affect actual investment performance.  Individual investor’s results will vary.  Past performance does not guarantee future results.


The MSCI ACWI (All Country World Index) Index) is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed and emerging markets. As of June 2007 the MSCI ACWI consisted of 48 country indices comprising 23 developed and 25 emerging market country indices.


The Russell 2000 index is an unmanaged index of small cap securities which generally involve greater risks.


Barclays Capital US Aggregate Bond Index – Broad-based benchmark that measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.


Barclays Capital US 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.


Dow Jones U.S. Select Dividend™ Index: Represent the country's leading stocks by dividend yield.


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