Well my crystal ball was working in October 2014 (thank you God). In my Monthly Outlook, I indicated I anticipated increasing volatility in the financial markets but that any downside would be limited. Both of those happened during the month. It was a real roller coaster ride in October as we experienced 12 days (out of 23 trading days) with greater than 1% moves up or down during the month (basis S&P500). This volatility led to a decline of 9.83% from the all-time intra-day high on 9/19/14 to the intra-day low on 10/15/14 (basis S&P 500). This was virtually spot on the 10% correction I have been anticipating.
While volatility remained throughout the month, the equity market found a bottom on 10/15/14 and proceeded to climb to close the month at a new all-time closing highs on both the S&P 500 and the Dow Jones Industrial Average. Does this mean nothing but blue skies ahead. Not hardly.
So what’s ahead?
- The US Federal Reserve has ended their quantitative easing (bond buying) program. The next step will be when they start to tighten monetary policy by raising interest rates. I don’t anticipate this until the 2nd half of 2015, but it is something the financial markets are focusing on right now. Increasing interest rates will cause declines in fixed income investments and higher volatility. However, Fed tightening is not necessarily bad for the stock market. “During the 1990s tightening cycle, the S&P increased almost three-fold, while fed funds increased from 3.00% to 6.50%. During the 2000s tightening cycle, the S&P increased +30%, while fed funds increased from 1.00% to 5.25%.” (source: ISI)
- International economic activity remains depressed, especially in the European Union and China. How effective the central banks and national governments are in improving their economies will have an impact on US financial markets. If foreign economies slip further, it will be a drag on US results. I am specifically watching out for deflation in the Eurozone. “Declining prices, if they persist, generally create a vicious spiral of negatives such as falling profits, closing factories, shrinking employment and incomes, and increasing defaults on loans by companies and individuals.” – Investopedia.com
- US Midterm Elections – Tuesday 11/4/14 are the US Midterm elections. All of the House of Representatives and 36 out of 100 Senate seats are up for election. Presently the Democrats control the Senate and the Republicans control the House. Right now it appears that the Republicans will maintain control of the House after the election. The Senate appears too close to call, with the Republicans gaining seats but perhaps not enough to take over the majority (they need a net gain of 6 seats to take control). Regardless of the outcome, midterm elections tend to have a generally positive impact on US equity markets as shown in the tables below (courtesy of Schaeffers Research)
Lastly, we are heading into the best period, seasonally, for equity markets, with November and December being the 3rd and 2nd best months, respectively, for equity investments based on the Dow Jones Industrial Average from 1950 – 2012 (see the table in my October 2014 Monthly Outlook).
In conclusion, I look for volatility to remain, albeit at a lower level, in November. Interest rates, basis US 10yr Treasury, to move up slowly towards 2.50%. Equity markets will consolidate the end of October gains, then pullback slightly before grinding higher into the end of the year.
November Calendar of Events (comments and additions for future months are always welcome)
- November is National Novel Writing Month. I list this because my oldest daughter, Satya’s first novel – Hello Morning – will be published at the end of the month!
November 4th Election Day – everyone should vote – it’s your right
November 11th Veterans Day – let’s remember our Veterans!
November 20th Great American Smokeout – encourage smokers to quit – even if just for this one day
November 27th Thanksgiving – let’s all give thanks for all our blessings.
I hope this report is useful to you. Please call me with any questions or concerns.
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