by Linda S. Parenti, CFA
President & Chief Investment Strategist
October was disappointing for both equity and fixed income investors. For the month, the S&P 500 was down 1.8% and the U.S. bond market aggregate index declined 0.8% on a total return basis. Stocks in the healthcare and real estate sectors were especially hard hit. Rising interest rates benefited financial sector stocks, but put downward pressure on most bonds, especially those with longer maturities. Commodities fell as well reflecting in part a rise in the dollar.
We are now past midpoint in the third quarter earnings season with 85% of the companies in the S&P 500 index having reported. As I mentioned in last month’s Market Insights, evidence of corporate earnings growth is needed to justify higher stock prices. On average for the companies that have reported so far, both sales and earnings growth are positive and coming in higher than the prior six quarters. More importantly, company guidance for next quarter has been more optimistic and the typical revisions from Wall Street analysts to their forward earnings estimates have also been less drastic than usual.
Improvement in earnings growth is welcome, yet equities have been under pressure mostly due to anxiety over the impact the election may have on our economy and markets. Uncertainty tends to create higher market volatility, so we could be pleasantly surprised with less market volatility once the outcome is known. Still, be prepared that if the election results are highly unexpected, the markets may indeed have an immediate reaction. I believe any pullback could potentially be short-lived, such as the drop and sharp rebound by the markets following the unexpected Brexit vote. Fear and speculation can certainly move markets in the short term, but it is the direction of the economy and earnings that matters most in the long term. Policy and legislation do impact our economy, but they take time to implement. Given an improved earnings picture and the positive readings from recent key economic reports, I believe stock prices have further room to advance post-election.
RISKS AND IMPORTANT CONSIDERATIONS
Views and opinions expressed here are for informational and educational purposes only and may change at any time based on market or other conditions or may not come to pass. This material is not a solicitation to buy or sell securities and should not be considered specific legal, investment, or tax advice. The information provided does not take into account the objectives, financial situation, or particular needs of any specific individual. All investments carry a degree of risk and there is no certainty that an investment will provide positive performance over any stated period of time. Equity investments are subject to company specific and market risks. Equities may decline in response to adverse company news, industry developments, or economic data. Fixed income securities are subject to market, credit, and interest rate risks. As interest rates rise, bond prices may fall. Past performance is no guarantee of future results.