The Markets – October Recap

The Markets – October Recap

Domestic equities defied October’s reputation as a bad month for stocks, making up for at least some of the damage done since July. Only a 2%-plus loss on the month’s final trading session kept the Dow from having its best October in more than a century, while the small-cap Russell 2000’s gain represented its third-best month ever. The S&P and Nasdaq regained roughly two-thirds of their losses since the third week of July. And despite uncertainty over Europe, even the Global Dow saw double-digit improvement.

Renewed optimism about economic recovery and Europe’s ability to address its debt problems caused Treasury bond prices to fall, pushing the 10-year yield from record lows to above 2% once again. Oil prices turned upward, ending the month over $90 a barrel as the dollar lost ground against a basket of six foreign currencies. Meanwhile, gold reversed some of its recent losses, returning to almost $1,750 an ounce.

• With Italy and Spain facing lower credit ratings and higher borrowing costs, eurozone leaders finally announced an agreement they hope will build a firewall around Europe’s sovereign debt problems and enable banks to keep credit flowing in the region. Under the agreement, banks holding Greek debt will accept a 50% haircut on the amount they are owed; it is hoped that will enable Greece to cut its debt to 120% of its gross domestic product (GDP) by 2020. Banks will be required to have higher capital reserves to help cushion future losses. The agreement also raises the resources of the European Financial Stability Facility to roughly €1 trillion and allows the EFSF to maximize those resources by guaranteeing sovereign bonds or setting up special-purpose vehicles to provide financial support.
• The odds of a double-dip recession seemed to dim after the Commerce Department said the economy grew almost twice as fast in the third quarter as it did during the second. However, the figure could be revised later, and the 2.5% growth rate wasn’t enough to do much about the unemployment rate, which remained stuck at 9.1%.
• September’s 0.3% consumer inflation rate was the third increase in as many months. According to the Bureau of Labor Statistics, that put the inflation rate for the last 12 months at 2%. At the wholesale level, inflation was worse; driven mostly by a 2.3% jump in energy costs and a 10% increase in the prices of vegetables, it spiked up 0.8% in September, for a 6.9% rate for the last year.
• According to the Commerce Department, consumers’ income rose 0.1% in September, and they promptly went out and spent 0.6% more than they did in August, especially on autos. That led to a 1.1% improvement in September’s retail sales–the biggest increase in seven months. However, the savings rate dipped to 3.6%.
• Sales of new single-family homes fell 2.3% in August, the Commerce Department said, while the National Association of Realtors® said sales of existing homes were down 3% in September. However, home prices saw their fourth straight month of increases and were up an average of 0.9% in July for the 20 cities measured by the S&P/Case-Shiller index. Housing starts shot up 15% in September to the highest level since before the homeowner’s tax credit expired last year.
• Manufacturing data was mixed; new durable goods orders and the Federal Reserve’s Empire State numbers were down in September, while the Institute for Supply Management and the Philadelphia Fed’s survey of manufacturing activity both showed improvement. Nationwide, the Fed said industrial production was up 0.2% in September.