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Monthly Market Insight - October 2018

Monthly Market Insight - October 2018

October 11, 2018
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US Markets

Stock prices turned in a mixed performance for September as large-cap issues trended higher and trade talks progressed. Meanwhile, technology stocks struggled, pulling the NASDAQ Composite down.

The Dow Jones Industrials picked up 1.9 percent while the Standard & Poor’s 500 Index gained 0.43 percent. The NASDAQ Composite Index lagged, falling 0.78 percent.1 

Markets opened on a weak note as technology stocks reacted to congressional testimony regarding social media's influence. Markets were further depressed by a slump in oil prices, as well as President Trump’s plans for further tariffs on Chinese goods.

 All About Trade

Once the details of these tariffs were announced, investors were encouraged that U.S. tariffs were less harsh than expected and China’s retaliatory tariffs were lower than threatened.

The news came as a welcome relief, leading to a wave of new buying that propelled the Dow Jones Industrials and the S&P 500 to new historical highs. However, technology and small-capitalization stocks played a limited role in this run-up.

Fed Bumps Rates

With the month coming to an end, the Fed announced a 0.25 percent hike in the federal funds rate and raised the potential for an additional hike before year-end. Though the hike was telegraphed to investors, markets trended lower following the news.

Sector Scorecard

While the S&P 500 Index ended the month in positive territory, only selected sectors participated in the rally. Gains were seen by five industry sectors, including Consumer Discretionary (+2.37 percent), Energy (+1.15 percent), Health Care (+2.71 percent), Industrials (+0.98 percent), and Technology (+0.12 percent). Declines were recorded in Communication Services (-0.90 percent), Consumer Staples (-0.44 percent), Financials (-2.66 percent), Materials (-2.74 percent), Real Estate (-3.97 percent), and Utilities (-2.83 percent).2

What Investors May Be Talking About in October

With less than a month to go before the midterm elections, many investors are watching whether Republicans will maintain control of the House and Senate. 

History shows the party of the incumbent president generally loses Congressional seats during midterm elections. In the midterm election of President Obama’s first term, Democrats lost 63 seats in the House and six in the Senate. In the midterm election of President George W. Bush, Republican party lost 30 seats in the House and six in the Senate. 3,4

History Lesson

Stocks tend to perform differently based upon the political makeup of the presidency and Congress. Since 1933, the S&P 500 Index has had its most success when Republicans have controlled the presidency and both houses of Congress, posting a 15.1 percent average annual return.5

When Democrats controlled one Congressional chamber during a sitting Republican president, the average annual return was still a healthy 10.8 percent. 5

The midterms may cause some short-term volatility. They also may prompt some market watchers to change their forecasts. Regardless of the outcome, remember why you invested, stay the course, and avoid overreactions.

World Markets

Overseas markets were higher in September, as the MSCI-EAFE Index gained 1.22 percent.6

European markets posted gains, overcoming trade tensions, as well as snags in Brexit negotiations, but stumbled later on political developments in Italy.

France gained 1.6 percent, and Great Britain added 1.3 percent. Germany, meanwhile, slipped 0.9 percent.7

Stocks in the Pacific Rim countries were mixed. Japan rose a solid 5.5 percent, but Hong Kong slipped 0.4 percent. Australia retreated 1.8 percent.8

Indicators

Gross Domestic Product

The final reading on economic growth in the second quarter remained unchanged at 4.2 percent.9

Employment

Nonfarm employment increased by 201,000 in August, keeping the unemployment rate steady at 3.9 percent. Year-over-year wage growth appears to be picking up, as wages grew by 2.9, the largest rise since mid-2009.10

Retail Sales

Consumer spending cooled off in August, as retail spending inched up 0.1 percent. The strong retail sales number in July was revised higher, from 0.5 percent to 0.7 percent.11

Industrial Production

Industrial output rose 0.2 percent, led by utility and motor vehicle production. It was the third consecutive month of increased output.12

Housing

Housing starts rose 9.2 percent, driven by a sharp increase in multi-family dwellings (+29.3 percent). Single-family homes, which account for the bulk of new home construction, rose to a lackluster 1.9 percent.13 New home sales increased 3.5 percent, rebounding from two consecutive months of declines.14 Sales of existing homes were unchanged in August, following four consecutive months of declines. Compared to August of last year, sales were 1.5 percent lower.15

Consumer Price Index

Easing for the first time this year, the price of consumer goods rose 0.2 percent in August. Relative to a year earlier, inflation grew at 2.7 percent, versus a 2.9 percent rate for the previous two months’ year-over-year period.16

Durable Goods Orders

Recording its biggest gain since February, orders for long-lasting goods jumped 4.5 percent, handily beating economists’ forecast of 2.1 percent.17

The Fed

Federal reserve officials unanimously voted to increase the federal funds rate by 0.25 percent. This will be the third such rate hike this year, lifting the benchmark rate above 2 percent for the first time since the Fed’s intervention following the credit crisis.

Fed officials also hinted at one more rate hike before the year ends, while reaffirming their positive view of the U.S. economy.18

  1. The Wall Street Journal, September 30, 2018
  2. FactSet Research Systems, September 2018
  3. The American Presidency Project, University of California, Santa Barbara, 2018
  4. Treasury Insights, Wells Fargo Investment Institute, 2018
  5. Treasury Insights, Wells Fargo Investment Institute, 2018. Past performance does not guarantee future results. Investing involves risks, and investment decisions should be based on your own goals, time horizon and tolerance for risk. The return and principal value of investments will fluctuate as market conditions change. When sold, investments may be worth more or less than their original cost.
  6. MSCI.com, September 30, 2018
  7. MSCI.com, September 30, 2018
  8. MSCI.com, September 30, 2018
  9. The Wall Street Journal, September 27, 2018
  10. The Wall Street Journal, September 7, 2018
  11. The Wall Street Journal, September 14, 2018
  12. The Wall Street Journal, September 14, 2017
  13. CNBC.com, September 19, 2018
  14. The Wall Street Journal, September 26, 2018
  15. CNBC.com, September 20, 2018
  16. The Wall Street Journal, September 13, 2018
  17. The Wall Street Journal, September 27, 2018
  18. The Wall Street Journal, September 26, 2018