Dan Wanstreet, CFA - Senior Advice & Portfolio Specialist

Transcription

1 Dan Wanstreet, CFA - Senior Advice & Portfolio Specialist October 2017 Recap October historically has been a month in which U.S. stocks sometimes experience outsized volatility and sharp downturns (see: 1929, 1987, and 2008). That trend did not hold true this year, as stocks, Treasury yields, and the U.S. dollar increased in concert with solid updates on the U.S. economy and a flurry of central bank and political news. In fact, the market s so-called fear gauge, the CBOE Volatility Index (VIX), dipped to the lowest level on record in October. The Dow Jones Industrial Average (+4.3%), S&P 500 (+2.2%), and Nasdaq (+3.6%) each tallied their best monthly performance since February as Technology shares paced the gains. Earnings results were mostly positive, including standout reports from some of the world s largest publicly traded companies. Earnings were particularly strong for multinational companies within the Dow. A tailwind from first-half weakness in the dollar and robust global growth helped the blue chip benchmark outperform the S&P 500 by the widest monthly margin since The Dow crossed its sixth 1,000-point milestone in the past 12 months, needing just 76 days to climb from 22,000 to 23,000. IBM (IBM $151.58) was a notable outperformer, experiencing its best session in eight years after giving optimistic forward guidance related to its cloud business. Other October Dow leaders included Johnson & Johnson (JNJ $140.08), 3M (MMM $232.22), Caterpillar (CAT $136.63), and UnitedHealth Group (UNH $212.87), which all posted third-quarter results above consensus expectations. General Electric (GE $20.14) bucked the trend, with shares tumbling 16.6% in October; the drop was fueled by the industrial giant s worst session since 2011 following a lackluster earnings release. In the S&P 500, Technology shares were responsible for more than 75% of the index s monthly gain according to FactSet. In fact, just five index stocks - (Facebook (FB) $178.92; Amazon (AMZN) $ ; Google-parent Alphabet (GOOGL) $ ; Apple (AAPL) $ ; and Microsoft (MSFT) $840.14) - - accounted for more than 50% of the October advance. Three of those companies (Microsoft, Amazon, and Alphabet) reported earnings after the bell on Oct. 26, and by the end of the next session those three companies had added more than $140 billion in market capitalization -- more than the total market cap of McDonald s (MCD $168.65). Telecom shares lagged with AT&T (T $33.30) retreating 14% in October after the company announced a steeper-than-expected drop in cable subscribers with cord-cutting continuing to take its toll on the space. Sprint (S $6.67) and T-Mobile (TMUS $58.91) also dropped amid news that merger talks between the mobile giants had broken down. Automakers were a bright spot, with General Motors (GM $42.34) climbing more than 6% after U.S. auto sales increased for the first time in a year in September. Financials also experienced strong gains, as the big banks mostly topped Wall Street profit projections despite a drop in trading revenue. Overall, with more than half of the S&P 500 reporting earnings through the end of October, more than 79% of companies in the index beat profit projections, well above the five-year average of 69%. According to Reuters, S&P 500 earnings were set to climb 7% in the quarter, better than the 5.9% projection at the outset of October. Updates on the U.S. economy also were generally positive, although the first-friday jobs release started October on mixed footing. The U.S. Department of Labor reported nonfarm payrolls fell in September for the first monthly drop since 2010, decreasing 33,000 versus consensus projections of an 80,000 job gain. The report was not all bad, however, as average hourly earnings climbed more than expected and the unemployment rate fell to its lowest level since 2001 (4.2%). Further, a Investment and Insurance Products: NOT FDIC Insured NO Bank Guarantee MAY Lose Value

2 subsequent report showed that weekly initial jobless claims dipped to the lowest level since March A separate set of releases from the Institute for Supply Management (ISM) showed that U.S. manufacturing activity climbed to the highest level since 2004 in September while the services expanded the most since The Conference Board reported that consumer confidence increased to the highest level since 2000, while the U.S. trade deficit narrowed to its lowest level in 11 months. Additionally, the first blush report on third-quarter GDP showed the U.S. economy grew by 3% from the same period last year, well above the expected 2.6% increase as the economy forged ahead despite hurricane-related weakness. Overall, the Citigroup U.S. Economic Surprise Index (a tool used to gauge how economic data measures up to expectations) finished October at its highest level since April. In central bank news, speculation on who President Trump would nominate to succeed Janet Yellen as head of the Federal Reserve took center stage over monetary policy. By the end of the month, current Fed Governor Jerome Powell stood alone as the most likely nominee, beating out Stanford University Economist John Taylor and incumbent Chair Yellen. Analysts suggested that Powell represented continuity at the central bank, as he had not dissented from a single majority decision in his five years as Fed governor. Investors also focused on Washington for indications of when -- or if -- the Republican-controlled Congress would put forth its long-anticipated tax reform measures. President Trump indicated optimism on several occasions throughout the month that reform measures would be passed by the end of Both chambers of Congress bolstered this sentiment when they narrowly voted to approve budget measures allowing the GOP to pass its tax plan without votes from the opposition Democratic Party. Amid the economic news and political proceedings, the U.S. Dollar Index advanced more than 1% in October for its second-straight monthly gain. Treasury yields climbed modestly along the curve, with the yield on the benchmark 10-year U.S. Treasury note briefly climbing to its highest level since March (2.45%) before settling back at 2.38% to end the month. In sympathy with the expectation for an interest rate hike from the Federal Reserve in December, the yield on the two-year security climbed above 1.60% for the first time in more than a decade. According to Fed Fund Futures tracked by CME Group, markets were pricing in more than a 90% chance of a third 2017 rate increase at the end of October, up from just a 30% probability two months before. Overseas, developed markets around the globe experienced strong October gains. Japan led the way, with the Nikkei 225 jumping 8.1% for its strongest month in two years. The index finished October at a 21-year high (including a record 16-session winning streak) following Prime Minister Shinzo Abe s comprehensive parliamentary election victory and weakness in the Japanese yen. In Europe, the STOXX 600 finished the month 1.8% higher with benchmarks in Germany and the U.K. reaching alltime highs. Shares were bolstered by dovish sentiment from the European Central Bank and economic data that showed unemployment reaching its lowest level since 2009, and manufacturing activity and consumer confidence reaching the highest levels in a decade. Even Spain s IBEX finished October with a gain, despite ongoing uncertainty surrounding possible Catalan secession. Disclaimers Pricing as of market close on November 3, 2017 unless indicated otherwise. All investing involves some degree of risk, whether it is associated with market volatility, purchasing power or a specific security. Additional information available upon request. Past performance is not a guide to future performance. The material contained herein has been prepared from sources and data we believe to be reliable but we make no guarantee as to its accuracy or completeness. This material is published solely for informational purposes and is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or investment product. Opinions and estimates are as of a certain date and subject to change without notice.

3 Index Definitions: The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. The S&P 500 Index is a capitalization-weighted index of 500 stocks, representing all major industries. The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The Nikkei-225 Stock Average is a price-weighted average of 225 top-rated Japanese companies listed in the First Section of the Tokyo Stock Exchange. The US Dollar Index measures the performance of the US Dollar against a basket of foreign currencies. The STOXX Europe 600 Index is derived from the STOXX Europe Total Market Index (TMI) and is a subset of the STOXX Global 1800 Index. With a fixed number of 600 components, the STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. The Chicago Board Options Exchange SPX Volatility Index (VIX) reflects a market estimate of future volatility based on the weighted average of the implied volatilities for a wide range of strikes.

4 U.S. Markets S&P Dow Jones Industrial Average Nasdaq Composite S&P 400 Mid Cap S&P 600 Small Cap U.S. Sector Performance Consumer Discretionary Consumer Staples Energy Financials Health Care Industrials Information Technology Materials Telecom Utilities International Markets U.K. FTSE Germany DAX France CAC Spain IBEX Italy FTSE MIB Greece ATHEX MSCI Emerging Market Shanghai Composite Japan Nikkei Hong Kong Hang Seng Brazil Bovespa Russia Micex India Sensex Treasuries Maturity Close October September Historical Yields August July 2-Year Year Year Year

5 Municipal Bonds Maturity Close October September 3Q 2017 S&P Municipal Bond Index S&P Muni Bond Long Intermediate S&P Muni Bond Intermediate S&P Muni Bond Short S&P Muni Bond Investment Grade S&P Muni Bond High Yield S&P Muni Bond General Obligation Commodities Front Month Futures Close October September 3Q 2017 CRB Index Oil/bbl Natural Gas Gold Silver Copper Nickel Foreign Exchange Currency Close October September 3Q 2017 Dollar Index Euro/USD USD/Yen GBPound/USD USD/CAD USD/Krona USD/Swiss Franc Source: Bloomberg *All prices as of the close Oct 31, 2017 The opinions expressed here reflect the judgment of the author as of the date of the report and are subject to change without notice. Any market prices are only indications of market values and are subject to change. The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy. Additional information is available upon request. Please contact your Financial Advisor. Wells Fargo Advisors is a trade name used by Wells Fargo Clearing Services, LLC and Wells Fargo Advisors Financial Network, LLC, Members SIPC, separate registered broker-dealers and non-bank affiliates of Wells Fargo & Company Wells Fargo Clearing Services, LLC. All rights reserved. CAR