October numbers game

Mike Loewengart, Vice President of Investment Strategy

E*TRADE Capital Management

11/01/17

This year’s World Series didn't disappoint. Not in the least. It was a back-and-forth, seven-game thriller between the Astros and Dodgers, one that included a 13-12 extra-inning seesaw that will be talked about for years. Let’s put it this way: History will not confuse this series with the exceedingly low volatility in the market this year.

Baseball is a numbers game. Whether batting average, home runs, or the intricate advanced analytics that are now en vogue, baseball tracks it all. And when looking to assess player performance, there’s an old saying: You are what the back of your baseball card says you are.

On October 27, the US Commerce Department reported that the back of the US economy’s baseball card shows continued strength in the third quarter. In fact, Q3 results exceeded expectations. The advanced estimate of gross domestic product (GDP), the granddaddy of all economic indicators, grew at a 3% annualized rate, versus the 2.5% expected growth rate.

A variety of inputs, including strength in personal spending, government spending, private investments, and exports, contributed to the result and likely caught the Street’s eye. Notable, too, is the fact that business fixed investment was up a solid 1.5%, which could suggest growth is broadening. With companies seemingly upbeat about the outlook, and with overseas markets improving, markets appear to have had the footing they needed to continue to run in October.

US gross domestic product, 11/1/17

Source: US Bureau of Economic Analysis

Domestic equities

Reports of strong quarterly earnings, a better-than-expected GDP report, and consumer sentiment, which was at its strongest in 13 years in early October, were likely factors in domestic stocks moving higher.

The S&P 500® and the Nasdaq Composite hit new highs, amid large gains in technology following positive earnings results from Amazon (NYSE: AMZN), Microsoft (NYSE: MSFT), Alphabet (NYSE: GOOG) and Intel (NYSE: INTC).

Not to be left behind, the Dow Jones Industrial Average notched its own record high, surging past the 23,000-point mark for the first time ever in October. Some market observers pointed to strong earnings from industrial stocks, including Caterpillar (NYSE: CAT) and 3M (NYSE: MMM), as drivers.

U.S. equity performances in October

Source: FactSet

International equities

Emerging markets bounced back from September, powered by India, Korea, and Taiwan. Observers also pointed to solid economic data out of China, including GDP, industrial production, and retail sales.

Among developed markets, Japan’s Nikkei 225 Index went on a record-breaking, 16-session win streak and closed at a 21-year high on October 24. The index seemed to climb amid investor expectations that Prime Minister Shinzo Abe’s ruling coalition would win a snap parliamentary election—which it did, in resounding fashion.

International equity performances

Source: FactSet

Fixed income

The fixed income markets were largely mixed. Although interest rates were higher across the yield curve, some parts of the market were able to post moderately positive returns, including high yield bonds. Segments with the greatest interest rate exposure were the most negatively affected, specifically intermediate- and long-term Treasuries.

As for goings on at the Federal Reserve, indications toward the end of the month were that President Trump favored nominating Federal Reserve Governor Jerome Powell as the next Fed chairman, a move that would signal continuity for monetary policy. Economist John Taylor, also thought to be in the running, is seen by market observers as more hawkish than current Fed Chair Janet Yellen.

Best and worst fixed income segments October

Source: Morningstar

The bottom line

Baseball’s the only major sport without a clock, with its time measured in innings. So until that final out is recorded, no one really knows when the game’s going to end. The same is true of this current bull market. But if looking at the back of the market’s baseball card, history tells us that it’s going to end, sooner or later.

There are always unique stories and circumstances behind the numbers, but investors can typically count on several old standbys when pullbacks do occur:

  • Investors shouldn’t be surprised or alarmed—pullbacks are a normal part of investing.
  • It’s important to prepare with the right mix of domestic and international stocks as well as fixed income securities.
  • Typically, the name of the game is diversification, which some have described as the only free lunch in investing.1

The final out of this baseball season has been recorded. But it doesn’t appear to be the bottom of the ninth for this bull market. After eight strong years of market returns, though, a few reminders of seasons past can help inform investors how they may want to approach their future investment decisions.

As always, thank you for reading.

 

Mike Loewengart

Vice President, Investment Strategy

E*TRADE Capital Management, LLC

 

Additional contributor:

Andrew Cohen, CFA

Director, Investment Strategy

E*TRADE Capital Management, LLC

 

Mike Loewengart is the Vice President of Investment Strategy for E*TRADE Capital Management, LLC. Mike is responsible for the asset allocation and investment vehicle selections used in E*TRADE’s advisory platforms. Prior to joining E*TRADE in 2007, Mike was the Director of Investment Management for a large multinational asset management company, where he oversaw corporate pension plan assets. Early in his career, Mike was a research analyst focusing on investment manager due diligence for the consulting divisions of several high-profile investment firms. Mike holds series 7, 24, and 66 designations, as well as the Chartered Alternative Investment Analyst (CAIA) and Certified Investment Management Analyst (CIMA) designations. He is a graduate of Middlebury College with a degree in economics.

Andrew Cohen is a Director of Investment Strategy for E*TRADE Capital Management, LLC. Prior to joining E*TRADE, Andrew was the Director of Investments and Operations for a large Registered Investment Advisor, where his responsibilities included investment manager research, asset allocation, and portfolio construction. Previously, he was a Senior Research Analyst and Team Leader for a leading wealth management platform. He is a CFA charterholder and a member of both the New York Society of Security Analysts and CFA Institute. He is a graduate of Virginia Tech with a B.S. in Finance.

 


1. Saft, James. “Global diversification still works, but only for the patient: James Saft,” Reuters, 12 Apr. 2017. http://www.reuters.com/article/us-markets-saft/global-diversification-still-works-but-only-for-the-patient-james-saft-idUSKBN17E2YP