Investments Tumble in October

I don’t know if the presidential election is affecting the stock market, but some analysts believe that’s the case. They also believe the stock market anticipates the election results. Their conclusion is that when the stock market rallies into election day, the incumbent party will win the election. When the market declines leading up to the election, the party out of power will win. If correct, that means Donald Trump will win next week. Some analysts, however, look at other assets, such as the Mexican peso, and conclude the markets are forecasting a Hillary Clinton win.

It’s been a turbulent year for many investments. We started with the sharp declines of January and early February. Then, there was a strong recovery in many assets. The month of October, however, was negative for most investments.

In stocks, the S&P 500 lost 1.73% for October but is ahead 5.87% for the year. The Dow Jones Industrial Average lost 0.78% for the month and is up 6.21% for the year. The Russell 2000 lost 4.60% in October but still is ahead 6.41% for 2016. The All-Country World Index lost 1.91% for October but has returned 5.22% for the year. Emerging market stocks lost only 0.83% in October but are up 16.28% for 2016.

It’s a good thing we sold long-term treasury bonds in our Retirement Watch portfolios back in June. They lost 4.38% in October and their gain for 2016 is down to 10.74%. Investment-grade bonds lost 1.53% in October but are up 8.77% for 2016. Treasury Inflation-Protected Securities (TIPS) lost 0.54% in October and returned 6.94% for 2016. High-yield bonds lost 0.98% and are up 11.34% for the year.

The dollar was up 3% in October but is down 0.90% for the year.

Energy-based commodities lost 1.75% in October, and their return for 2016 is down to 2.32%.

Broader-based commodities lost 0.30% in October and are up 8.99% for the year. Gold is down 2.92% for October but still has returned 20.43% for the year.

Something interesting to watch for is that we have a chance at the rarity of a calendar year when the major U.S. stock indexes actually return something near the long-term average. Each December and January, major analysts forecast the next year’s returns and almost always forecast a return around the long-term average of 9%. Yet, there rarely is a year when the return is around 9%. Usually it is substantially higher or lower. There’s still a lot of time left, but 2016 has a chance of being a year when the return is around 9%.

The Data

There shouldn’t have been any surprises in last Friday’s first estimate of third-quarter gross domestic product (GDP). The 2.9% annualized growth was significantly higher than second-quarter growth, but we already knew that from the monthly data we were seeing. The laggard in the economy continues to be business investment, but it increased a bit in the third quarter. Inflation continued its gradual rise in the third quarter and is getting closer to the Fed’s target.

Consumer Sentiment, as measured by the University of Michigan, was down to 87.2. This was the lowest reading since September 2015 but is inconsistent with other measures of consumer sentiment.

The manufacturing reports for the week generally were positive.

The Chicago PMI declined from 54.2 to 50.6. That reading still indicates growth. This index is more volatile than others and has been especially volatile this year.

The PMI Manufacturing Index had a nice increase to 53.4 from 51.5. Most of the components in the index are at their highest levels in a year.

The ISM Manufacturing Index had a smaller increase, from 51.5 to 51.9. The ISM Index is a broader measure and likely is a better reflection of the overall state of manufacturing.

The Dallas Fed Manufacturing Survey shows a continued slow recovery in that region. The index was down only 1.5 compared to a negative 3.7 last month. The Production Index expanded for the fourth straight month.

Factory Orders increased a modest 0.3%, but that was higher than expectations, and last month’s growth was revised higher to 0.4%.

The non-manufacturing sector of the economy continues to do well. The PMI Services Index rose to 54.8 from 52.3. Consumer spending increased considerably during the month.

The ISM Non-Manufacturing Index declined to 54.8. But that was after an historic surge to 57.1 last month. The August measure was 51.4, the lowest level of the economic recovery. The current reading indicates solid growth in the services sector.

Productivity finally increased after several quarters of decline. The increase exceeded expectations at 3.1%. Because of the higher output, unit labor costs grew a modest 0.3%, down from 3.9% the last quarter.

Wages and income continued their steady increase. The Personal Income and Outlays report indicated that household income increased 0.3%, and wages increased by the same amount. Consumer spending increased more, a hefty 0.5%, after last month’s number was refined down to a negative 0.1%.

The PCE Price Index showed inflation 0.2% higher for the month and 1.2% for 12 months. Core inflation rose 1.7% over 12 months.

Leading up to Friday’s monthly Employment Situation reports, the ADP Employment Report indicated slightly less job growth than last month, 147,000 compared to 154,000. But last month’s number was revised higher to 202,000.

New unemployment claims rose by 7,000. Though the highest level since September, it’s not a significant change and still leaves the weekly and four-week average numbers near historic lows.

The Markets

The general decline in stocks continues.

The S&P 500 is down 1.87% for the week ended with Wednesday’s close. The Dow Jones Industrial Average declined 1.33%. The Russell 2000 tumbled 3.48%. The All-Country World Index declined 1.84%. Emerging market equities lost 2.67%.

Long-term treasury bonds lost 0.26%. Investment-grade bonds declined 0.45%. Treasury Inflation-Protected Securities (TIPS) lost 0.08%. High-yield bonds fell 1.97%.

The dollar lost 1.22%.

Energy-based commodities lost 4.01%. Broader-based commodities fell 2.42%. Gold gained 2.21%.

Bob’s News & Updates

Do you need gift ideas this year? Consider joining those who gave family and friends copies of the second edition of my book, “The New Rules of Retirement.” It’s the ideal, most up-to-date guide to any stage of retirement planning, even for those who’ve been retired for years. To receive signed copies at $25 per copy, send a check to Retirement Watch, LLC, P.O. Box 222070, Chantilly, VA 20153. We pay the shipping. Include your return address and any instructions about how to address the signature.

Some Reading for You

This article describes what can happen when a debit card is lost.

Here’s a discussion of common differences married couples have about retirement and how to resolve them.

The economic consequences of Britain’s leaving the European Union could be significant, according to this research.

I comment and link to these and other items on my public blog at http://www.bobcarlson.net.