Now that the month of October has come and gone, we are left with two key words to remember it by, “Risk On”. After a market correction in August and a financially troubled September, it would appear that October was the month of the bounce back. During the August and September time period, the S&P index returned a very concerning and very negative 8.5%. This is what we refer to as “Risk Off,” meaning no one wanted to own the riskier assets that typically make up a diversified portfolio. But for October we saw the polar opposite as the S&P index was up by more than 8%. So owning those riskier assets in October was rewarded nicely—“Risk On”.
There were many factors that contributed to October’s significant rebound. Below we offer a few of the economic highlights that we believe may have contributed to the strong market performance:
· In the 11th hour, the US Congress passed a two-year fix for the debt ceiling.
· Good earnings were reported by many of the major US companies.
· Housing data, especially housing starts, came in strong, as did builder sentiment.
· GDP was reported to have risen 1.5% in the 3rd quarter, following 3.6% in the 2nd quarter.
· The US consumer continued to show signs of health.
· The People’s Bank of China announced interest rate cuts for Chinese financial institutions.
· China ended its one-child-policy, now allowing two children per family.
· European and Japanese central bank leaders said they intended to remain very accommodative with regards to quantitative easing and interest rate policies.
· News out of the US Federal Reserve seemed to point toward a rate increase in December.
· Many analysts saw short-term technical buying signals, specifically citing the out-performance of lower quality stocks versus the higher quality names.
Of the points we highlighted, we found the Fed’s latest stance on interest rates and news from the ECB, Japan and China most interesting. Here is why. We believe that the Fed’s willingness to increase rates is confirmation of the relative strength of the US economy and its ability to absorb a modest rate increase. We also feel that the latest comments from Chair Yellen and her contemporaries can be understood as a clear departure from the idea that US monetary policy should be driven by the needs of the global economy. If you remember from our writings last month, it appeared that the Fed held off from raising rates in October because of its concerns about global growth rather than US growth.
Specifically, during the month of October, China did a little house keeping of its own when its central bank responded to lower than expected GDP and manufacturing data with a surprise cut to its lending and deposit rates. This was the 6th rate cut by the Chinese government in the last twelve months, and it seemed to boost the market’s confidence in the Chinese government’s ability to handle slowing growth without further disruption to financial markets.
Also, we continue to hear from the Bank of Japan and the European Central Bank about their commitment to economic stimulus and their respective quantitative easing programs. While this is a clear divergence from the policies of the US, we do believe these policies to be positive for the international markets at large.
We will see if the “Risk On” sentiment continues through November and into December, when the Federal Reserve might raise interest rates. Recent statements suggest they are prepared to do so, at least as of now. And as we mentioned above, central bankers and policy makers in Japan, Europe and China seem willing to do whatever it takes to maintain financial stability.