October did not disappoint for stock market investors as, once again, both domestic and international indices were higher for the month. Bonds continued to impress with the Aggregate Bond Index up 0.33% for the month. Commodities were strong as the US dollar index fell more than 2% as the first part of a US-China trade deal is expected to be signed as early as this month.
U.S. & International Stock Index Returns |
| Total Returns |
| Index October 2019 Year-to-Date |
| Dow Industrials 0.55% 15.94% |
| S&P 500 2.43% 21.17% |
| S&P 400 (Midcap) 1.20% 17.58% |
| S&P 600 (Small Cap) 5.52% 14.25% |
| MSCI World 2.84% 18.56% |
| MSCI EAFE 10.05% 13.70% |
| Bloomberg Agg. Bond 8.85% |
| CRB Commodity Index 4.18% |
| US Dollar Index 1.14% |
All data as of 11/01/2019, Source: Wells Fargo Investment Institute. [Wells Fargo Investment Institute, Inc. is a registered investment advisor and wholly-owned subsidiary of Wells Fargo Bank, N.A., a bank affiliate of Wells Fargo & Company.]
Stock Market
The third year of a presidential cycle has historically been a very good year for stock market investors. 2019 does not look like it is going to disappoint. October was productive as all the US-based indicators we follow turned higher. Even more impressive was the strong turn higher the Global MSCI EAFE after relative weakness during the first 9 months of the year. The steep selloff in the 4th quarter of 2018 feels like it never even happened.
Yet as we enter November the strong gains of 2019 are running up against major resistance on the charts. The S&P 500 (Chart #1) shows a new all-time high at the end of October that sits right at the overhead resistance. Unfortunately, we don’t have a newspaper from the future so we cannot tell you for sure what happens this month. What we will say, however, is that we believe a strong move above these levels will be very good for the S&P 500 for the final two months of the year.
Bond Market
October marked an end to the most recent downtrend in bond yields as the 10-year Treasury ended the month yielding just below 1.70%. While we have no idea where yields are going in the long term – too many factors to consider – in the coming months we think the 10-year Treasury can get back above 2%. We consider this move higher to be a counter-trend rally as opposed to a sustainable change in direction. In a global environment where many developed countries have negative yields, yields on US bonds can only move so high. From a technical perspective we see 2.1%-2.5% as our wide target range on the upside.
Currencies
The US Dollar Index took a hit in September, falling 2.23% for the month. In November we will be watching to see how the currencies react as the US and China get set to sign the first phase of a trade deal. Technically the index closed the month below the 18-month rising channel, a negative from our perspective.
Commodities
Nothing changed for commodities in October as the CRB index once again touched the downtrend line but could not break out to the upside. Gold, on the other hand, broke what 30 days ago looked like downside momentum. Fortunately for gold bugs the yellow metal caught a bid, managing to move higher for the month. Entering November, the technicals look positive with gold closing the month above $1,500 per ounce.
Looking Ahead
In our September Market Report we spent a fair amount of time discussing the economy and what we look at when thinking about the possibility of an economic recession. If you missed it, it is worth a read. As investors we are interested in recessions as they hurt corporate earnings, which ultimately negatively affects the stock market. While currently not in a recession, we noted that the trade war with China was starting to hit Corporate America’s bottom line, which will eventually start to limit capital spending along with hiring. Essentially, we argue that if the trade dispute is not resolved soon we are likely headed toward an economic recession.
Looking out over the next few months, however, the world of investments doesn’t look so bad. According to Jeffrey Hirsh of The Stock Trader’s Almanac, November kicks off the start of the seasonally strong season for stocks at a time when the stock market is at or near all-time highs during the 3rd year of a presidential cycle (also a historically strong period of time).
What our research has shown us we view as positive for the equity markets. Interest rates remain low with no reason to move higher in the foreseeable future. That trade deal we mentioned earlier? Phase 1 is expected to be signed later this month by President Trump and Premiere Xi. This, in our opinion, will likely be a positive catalyst for the equity markets. A possible side effect of such a signing could be a weaker dollar, which is helpful to US- based multinational corporations by both making their products more competitive in the global marketplace, but also helps boost earnings produced overseas.
Bottom line: We believe the stock market is lining up to have a good finish to an already strong year of market gains.
One caveat: historical strength for the market is no guarantee of strong stock prices this year.
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Wells Fargo Advisors Financial Network did not assist in the preparation of this report, and its accuracy and completeness are not guaranteed. The opinions expressed in this report are those of the author(s) and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request.
All investing involves risks including the possible loss of principal invested. Past performance is not a guarantee of future results.
Index returns are not fund returns. An index is unmanaged and not available for investment.
Dow Jones Industrial Average: The Dow Jones Industrial Average is a price-weighted index of 30 “blue-chip” industrial U.S. stocks.
S&P 500 Index: The S&P 500 Index consists of 500 stocks chosen for market size, liquidity, and industry group representation. It is a market value weighted index with each stock’s weight in the Index proportionate to its market value.
S&P Midcap 400 Index: The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between the S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.
S&P Small-Cap 600 Index: The S&P SmallCap 600 Index consists of 600 domestic stocks chosen for market size, liquidity (bid-asked spread, ownership, share turnover and number of no trade days) and industry group representation. It is a market value-weighted index (stock price times the number of shares outstanding), with each stock’s weight in the index proportionate to its market value.
MSCI World Index: The MSCI World Index is a free float-adjusted market capitalization index that is designed to measure global developed market equity performance.
MSCI EAFE® Index: The MSCI EAFE Index is designed to represent the performance of large and mid-cap securities across 21 developed markets, including countries in Europe, Australasia and the Far East, excluding the U.S. and Canada.
Bloomberg Barclays U.S. Aggregate Bond Index: Bloomberg Barclays U.S. Aggregate Bond Index is a broad-based measure of the investment grade, US dollar-denominated, fixed-rate taxable bond market.
NASDAQ Composite Index: The NASDAQ Composite Index measures the market value of all domestic and foreign common stocks, representing a wide array of more than 5,000 companies, listed on the NASDAQ Stock Market.
Russell 2000® Index: The Russell 2000® Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents
Technical analysis is only one form of analysis. Investors should also consider the merits of Fundamental and Quantitative analysis when making investment decision. Technical analysis is based on the study of historical price movements and past trend patterns. There is no assurance that these movements or trends can or will be duplicated in the future.
Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments. An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuations.
Investing in foreign securities presents certain risks not associated with domestic investments, such as currency fluctuation, political and economic instability, and different accounting standards. This may result in greater share price volatility.
Investments in fixed-income securities are subject to market, interest rate, credit and other risks. Bond prices fluctuate inversely to changes in interest rates. Therefore, a general rise in interest rates can result in the decline of the bond’s price. Credit risk is the risk that the issuer will default on payments of interest and/or principal. The risk is heightened in lower rate bonds. If sold prior to maturity, fixed income securities are subject to market risk. All fixed income investments may be worth less than their original cost upon redemption or maturity.
Investing in commodities is not suitable for all investors. The commodities markets are considered speculative, carry substantial risks, and have experienced periods of extreme volatility. Investments in commodities may be affected by changes in overall market movements, commodity index volatility, changes in interest rates or factors affecting a particular industry or commodity. Exposure to the commodities markets may subject an investment to greater share price volatility than an investment in traditional equity or debt securities. The prices of various commodities may fluctuate based on numerous factors including changes in supply and demand relationships, weather and acts of nature, agricultural conditions, international trade conditions, fiscal monetary and exchange control programs, domestic and foreign political and economic events and policies, and changes in interest rates or sectors affecting a particular industry or commodity. Products that invest in commodities may employ more complex strategies which may expose investors to additional risks, including futures roll yield risk.
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Robert I Cahill, Managing Partner Rob.Cahill@wfafinet.com
Jeffrey T. Bogert, Partner
Jonathan D. Soden, Partner Jon.Soden@wfafinet.com
Robert Sweeney, Financial Advisor Bob.Sweeney@wfafinet.com
Jay Knight, Associate Financial Advisor Jay.Knight@wfafinet.com