Equity Overview

Volatility returned with a vengeance in October, as 10 of 23 trading days saw gains or losses in the S&P 500 of at least 1%.  Value stocks outperformed growth stocks, and large cap stocks outperformed mid-cap and small cap stocks.  But almost all sectors of the market declined for the month.  The damage was particularly severe in the consumer discretionary sector which registered double-digit losses.  Within the technology sector, semiconductor stocks also sustained double-digit losses.

Third-quarter earnings reported in October were generally strong.  With 74% of S&P 500 companies reporting, 78% have exceeded consensus earnings estimates and 61% have exceeded consensus revenue estimates, in both cases better than their five-year averages. But investors failed to reward good earnings, and punished severely those companies that failed to beat expectations—especially companies that gave neutral or weak forward guidance.

Macro Overview

Economic data reported in October generally showed growth in the economy, but at or slightly below expectations, including retail sales and consumer sentiment.  Housing continued weak.  The minutes of the Fed’s September meeting, released in October, indicate that the Fed will stick to its policy of further interest rate increases, with the next bump likely to occur at the December meeting.

Meanwhile, a variety of factors—all leading to fears of a slowdown in U.S. growth—contributed to the markets’ October decline.  Uncertainty over the outcome of the midterm elections was one.  The ongoing trade war was another: a recent survey indicated that 35% of corporate CFO’s said it was their top concern.  And the tax cut, which helped propel the economy earlier this year, is expected to have diminishing impact in coming years.  Additionally, recent international data suggests slowing growth in Europe, China, and Japan.  Thus the current consensus among economists projects that GDP growth, which is around 3% this year, will decline to about 2% by 2020.