Market Currents

• Spooky October. Historically, October has always been a “difficult” market month, and this year’s October was no exception.  The broader stock market had its second-worst month of the year, after January, although the absolute level of decline was comparatively modest.  Bond values dropped as interest rates rose, and gold and oil also saw declines for the month.

• All Is Not Well With Health Care. After five years of outperformance, health care stocks are currently under intense scrutiny.  Drug price hikes are in the spot light, as they are a perennially easy target for grandstanding politicians, but the landmark legislation of Obamacare is groaning under unsustainable health insurance premium increases.  Meanwhile, our aging population will continue to fuel growing demand for healthcare services.  Immovable object, meet unstoppable force.

• Political Tail-Risk Is Rising. With the November election drawing close, early polling results suggest a Clinton victory.  Increasingly, investors are entertaining the possibility of Democrats winning control of at least one, if not both, of the two chambers of Congress.  After the US presidential election, whatever it may bring, we have a Brexit-like referendum being voted upon in Italy, in December.  The original Brexit negotiations are scheduled to commence in early-mid 2017.  Promptly following are the French and German elections.  Discontent among voters is not limited to the US.

• Earnings Are Encouraging. With nearly 1,000 companies having reported earnings, results have been decent.  About 74% of S&P 500 companies have reported earnings above their mean estimate; a strong “beat rate” and the highest since Q4 2009.  The index is now expected to report a blended earnings growth of 1.6% for Q3, marking an exit from earnings declines that had stretched through the past six quarters.

• Rate Hike Expectations Ticking Up. With the labor market practically at full employment and signs of inflation picking up, the Fed is expected to hike rates – only the second time over the past decade – this December.  Interest rates across the curve have been moving higher in anticipation.  (Remember, the Fed only sets short-term money rates.  The market does the rest, for longer maturities.)  We continue to believe the economy can sustain moderately higher rates.  They are a sign of strength, not weakness.

• (Still) Cautiously Optimistic. As we approach the seasonally bullish final months of the year, the intermediate outlook for the market appears mildly encouraging.  We believe earnings may have troughed, setting a stage for higher stock prices supported by stronger profits.  Valuation, though no longer cheap, is not wildly expensive either.  Some near-term volatility can be expected to accompany the election, and a later Fed rate hike, but we believe investors will eventually refocus their sights on the improving, if occasionally lumpy, growth.