STRONG LABOR MARKET CONTINUES: In October, the U.S. economy added 250,000 jobs. The Labor Force Participation Rate increased (more people outside the job market jumped back in), and thus the unemployment rate remained at 3.7%. In fact, the share of Americans in their prime working years, 25-54, who are working or looking for work rose to the highest rate since 2010 at 82.3%. The concern that Hurricane Michael might affect job growth in October did not materialize.
WAGES GROWING: Average hourly earnings increased by 83 cents. Wages have grown 3.1% over the past 12 months. That is the biggest year-over-year gain since 2009. Wage growth has been trending up. Weekly wages for high-school drop outs has risen 23.4% since 2010, compared to a 14.4% rise for college graduates, so low-skilled workers are benefiting from this labor market.
STOCKS ENJOY A GOOD WEEK DESPITE APPLE: As October turned to November, stocks took a turn back up to erase some of October’s losses. Strong earnings reports overall by U.S. and European companies buoyed stock prices all week. Companies in the U.S. and Europe are on track to report double-digit profit growth in the third quarter. The 350 companies of the S&P 500 that have reported earnings are up, on average, nearly 24% from a year earlier. On Friday, the Dow Jones Industrial Index dropped 109.91 points and about 100 points of that drop were attributable to Apple’s plunge. Apple’s third quarter report showed record revenues but its revenue forecast was not as optimistic, and Apple stock fell 6.6%. This week, tariff talk and rumors will continue to move markets as will concern about rising interest rates and inflation caused by the strong labor market. The Fed will certainly raise rates again in December as it tries to “normalize” rates and prevent the economy from overheating. Of course, for much of the week, investors will be focused on the U.S. midterm elections.
WHY WAS OCTOBER SO BAD?: What is it about the month of October? The stock market crash of October 1929 ushered in the Great Depression. Black Monday in October 1987 was driven by computer trading and portfolio insurance, though an economic calamity did not ensue. During October 2008, the S&P 500 Index lost nearly 17%, the biggest monthly decline of the financial crisis. The Panic of 1907 occurred in October and saw a 50% drop.
Despite its scary reputation, if we look back as far as 1970, the S&P 500 has averaged a gain in October. October ranks number three in performance when using the median return. September is the weakest month, on average. Between 2009 and 2017, we have experienced three declines in October, each losing just under 2%. In the six periods that saw an advance, the S&P 500 averaged a 5.3% advance. This year was different.
The S&P 500 Index declined 6.9%. Why?
The Fed and Interest Rate Fears: Early in the month, Fed Chair Jerome Powell said the fed funds rate is “a long way from neutral at this point.” A lot of people read that remark as a suggestion that the Fed was going to get a lot more aggressive in raising rates, rather than the careful, “thread the needle” approach indicative of Fed moves in the past.
Slowing Global Growth and Trade Tension: China is slowing and growth in Europe has softened. Of course, investors are worried about the impact of U.S. trade policies on earnings in the midst of this environment. Tech stocks in particular felt the sting of trade tension fear as the tech-heavy Nasdaq fell 9.2% (Amazon fell 20%).
October Effect: There were lots of stories about past October swoons in the stock market, and that always gets investors a bit more jittery, especially on top of lots of stories about how long this bull market has lasted.
TRADE DEAL WITH CHINA: On Friday, President Trump’s top economic advisor, Larry Kudlow, stated clearly that “We’re not on the cusp of a deal.” These remarks sent stocks downward. This is a continuing illustration that anything that gives investors confidence that a deal might get done will send stocks higher, and the opposite will occur when a news story suggests otherwise. This drama will play out for a while and be a factor in the volatility of stock prices in the coming months.
AUTO SALES: October vehicle sales in the U.S. were up 0.5% from September, but down 2.0% from one year ago.