Market Analysis – October 2016

Market Analysis – October 2016

A Growth Spurt for the US Economy, a headline in the October 29 Wall Street Journal, refers to the Commerce Department’s announcement that the US Gross Domestic Product (GDP) rose at a 2.9% annual rate for the third quarter ending in September. This is the fastest pace for GDP growth in two years, following the past three quarters below 2% growth. On October 31, another report announced that consumer spending climbed in September by the most in three months as incomes grew, signaling strength in the most important part of the US economy. These results show a solid handoff into the final quarter of 2016 and a chance for better growth in 2017.

stock or currency exchange market displau screen board

The 2.9% GDP growth announced October 28 helped the Dow Jones Industrial Average jump more than 80 points, but then fell to -8.5 after the FBI said it was reviewing new evidence regarding its email investigation of Hillary Clinton. As I wrote in last month’s letter, most analysts agree the US market favors a Clinton win at the polls November 8. Nate Silver’s 538 Forecast as of 6:30 pm on October 31 still has Hillary as a 75% favorite.

Also, business spending on research and development surged at an annual rate of 17% in the second quarter of 2016. This is the strongest research and development spending growth since 2006, which is significant, because during this recovery it has been weak. Economists consider research and development investment to be the most likely cause of a breakout in productivity and economic growth.

The 10-year US Treasury yield was 1.605% at the start of October and 1.834% at month’s end. This interest rate increase of 23 basis points or 14.3% meant negative bond performance in October. Bonds are a significant component of our Stable Growth and Cash Reserve strategies; fortunately, we emphasize short to intermediate-term bonds, which mitigates interest rate risk.

It seems we are all holding our breath to get past November 8, but there is no guarantee that eliminating the election uncertainty will have an immediate positive effect. Focusing on economic/investment fundamentals is strongly preferred to focusing on this disturbing election.

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