Weekly Market Commentary: November 3, 2015

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You have to really hunt to find red in October. October 2015 was a great month for stocks, as the S&P 500 Index rose 8.3% to help take the index from a year- to-date loss of over 9% on August 25, 2015, to a 1% gain as of Friday, October 30, 2015. Only 13 months since 1980 have been better, including only 3 Octobers [Figure 1]. The old market adage that October is the month where bear markets go to die held true. But the strong month raises the bar for markets to add to gains over the rest of the year, as higher stock prices have brought higher valuations. It is interesting to note that nearly all of these strong months came during the early or middle parts of bull markets, with March 2000 being the one notable exception. We look ahead at the calendar to identify catalysts that could potentially help stocks add to recent gains.

QUITE A MONTH

We believe October’s gains were driven primarily by two factors: the market’s increased comfort with China and market-friendly central bank actions. A relatively good start to earnings season and the budget deal in Washington to stave off a nasty debt ceiling debate also helped buoy sentiment.

China’s economy is likely growing more slowly than the official gross domestic product (GDP) statistics, although the reliable Chinese data we have suggest growth is stabilizing. The sixth interest rate cut in the past year by the People’s Bank of China (China’s central bank) and other stimulus initiatives have added to the market’s confidence that China would avoid a hard landing (see our latest Thought Leadership piece on China).

Central bank activities in the U.S. and Europe also helped drive stocks higher in October. In the U.S. for much of October, stocks benefited from the pushout of market expectations for Federal Reserve (Fed) rate hikes into early 2016. Stocks held their monthly gains after the Fed removed the portion of its policy statement about overseas growth concerns, even though the odds of a December rate hike increased (based on fed fund futures). Optimism about more stimulus from the European Central Bank (ECB) also helped boost U.S. stocks in late October.

Just because October was a big month does not necessarily mean that stocks will pull back between now and the end of the year. Since 1980, the S&P 500 has been up an average of 1.2% with gains 50% of the time in the two months following a calendar month gain of over 8%. That small potential gain, coupled with dividends, could potentially get the S&P 500 to the low end of our 5–9% total return forecast for 2015.

CATALYST CALENDAR

There are some potential events on the calendar that may be key determining factors of whether stocks can add to 2015 gains over the next
two months.

Federal Open Market Committee (FOMC) meeting (December 15–16)

We see this date as a potential catalyst because of the strong performance record stocks have historically

experienced after the Fed begins to hike rates.* The market may like getting the first hike out of the way, especially considering the implied positive growth message. That said, we recognize that the first Fed rate hike of an economic cycle has driven stock market volatility in the past (though usually short lived), so this date is a risk as much as a potential catalyst.

Also worth noting, Fed Chair Janet Yellen will speak on November 4, 2015, before the Financial Services Committee of the U.S. House of Representatives, and before the Economic Club of Washington on December 2, 2015. Fed Vice Chair Stanley Fischer will speak to the Economic Club of Washington on November 4, 2015. These events may provide insights into the path of future Fed policy and could act as secondary catalysts.

Job reports (November 6, December 4)

We believe the Fed is still very much on the fence about whether to hike rates in December or to wait until early 2016.

The two jobs reports will go a long way toward determining whether the Fed hikes rates at its next meeting in December. Recall the September jobs report was soft, with just 142,000 net new jobs created for the month (below the 2015 trend of around 200,000), although the unemployment rate held steady at 5.1%.

OPEC meeting (December 4)

OPEC will hold its biannual meeting on December 4. Oil has become more important for financial markets, as the drop in oil prices has significantly impacted overall corporate profits, capital spending, emerging market economies, and credit markets. While the status quo is the most likely scenario, it is possible that stocks may get some help from a reduction in OPEC’s production target and a subsequent bump up in oil. Saudi Arabia is in control and seems intent on preserving market share, but could try to talk up prices to help the smaller players without meaningfully altering its own production.

Holiday retail sales (December 11)

The government’s retail sales date for November, to be released on December 11, include the first month of the all-important holiday shopping season. For many retailers and tech gadget makers, more than half of their sales for the year come during the peak holiday shopping season (November and December). The consumer has been the key driver of U.S. economic growth—consumer spending rose at a 3.2% annualized pace during the third quarter, compared to overall GDP growth of just 1.5%. Based on recent sales trends and strong consumer balance sheets, we expect holiday shopping sales totals to grow roughly in-line with the National Retail Federation’s forecast of 3.7% in 2015. Holiday shopping may not be a big potential positive catalyst, but we do not expect it to be a drag either.

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