Happy Halloween! Got stocks? - Alaska Permanent Capital Management


Happy Halloween! Got stocks?

After a scary early October stocks have rallied back in the latter half of the month and are at or near all-time highs! The Dow set a record on Friday closing at 17,390, up 3.5% for the week. The broader S&P 500 gained 2.7% this week to close at a new record of 2,018. It was up 2.4% for October and 10.9% year to date.

After touching 1.82% intraday early in the month on global growth worries and falling inflation (oil driven) the 10 year Treasury yield ended October at 2.33%.

The stock market rally on Friday was caused in part by the Bank of Japan’s surprise decision to expand its stimulus measures. It really was “shock and awe” and according to ISI Strategies it is “probably the last big play for QE in Japan. If this increase in purchases fails to deliver a stronger nominal and real outlook it will be hard to make the case that the answer would be yet further massive BoJ balance sheet expansion.” It also confirms that global policymakers are continuing to ease – It’s your move ECB!

The fact is economic conditions are healthy, at least in the United States. That’s why the Federal Reserve this Wednesday voted to end its QE bond buying program and sounded more “hawkish” in believing the economy was picking up, labor markets improving, and that the recent drop in inflation was temporary and oil related. Still they will probably keep short term rates close to zero through the spring of 2015. As U.S. bond rates normalize (go up a bit – not a lot) and foreign rates stay low the dollar has appreciated on foreign exchange markets.

On Thursday we learned that US Real GDP rose 3.5% in Q3 after a 4.6% gain in Q2.  This was much stronger than the consensus. In fact, in four of the last five quarters real GDP grew 3.5% or more with only the weather dampening growth in Q1 of 2014.

The other big news was the European bank stress tests. Twenty-five banks of 130 failed the tests based on data from December 31, 2013. But since then many banks have raised capital and it looks like only 8 would fail the tests now (half of them are in Italy). Analysts viewed the tests as credible, but it’s not at all clear that European banks are in a position to start lending to spur economic growth and investment. The Euro Stoxx bank index rallied 6% into the release last Sunday and trended sideways this week.

Corporate earnings are chugging along even though revenues have been soft. So far 362 of the S&P 500 companies have reported third quarter earnings (EPS) which are up 9% y/y.  Over ¾ of those reporting have beaten Wall Street estimates.

Tuesday is Election Day. According to the New York Times’ statistical election-forecasting machine, the Republicans have a 70% chance of gaining a majority in the Senate. Real Clear Politics polling shows 52 Republicans, 45 Democrats and 3 Independents as most likely.

You’d think the markets would go up as a more business friendly group takes charge. But, much of this is probably “in the market.” We will know Tuesday night and then Wednesday morning as the markets digest the results.

Labor market indicators are the most important set of indicators for capital markets. Next Friday we will get news on the October employment report. Analysts expect the unemployment rate to remain unchanged at 5.9% and 225,000 new jobs to be created.

Have a safe and happy Halloween!

Jeff Pantages
Chief Investment Officer


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