November 3, 2014 - Upside After A Turbulent Month

Investors took advantage of a data-heavy week and rallied strongly, raising the Dow and the S&P 500 to new records. Upbeat economic reports and fresh hope for the global economy contributed to the market's optimism. For the week, the S&P 500 gained 2.72%, the Dow gained 3.48%, and the Nasdaq gained 3.28%.[1]

Markets surged Friday after Japan's central bank announced an unexpected expansion of its enormous quantitative easing program. The move came after economic reports indicated inflation (and demand) was weakening in Japan. Economists hope that pumping trillions more into the aging country's economy will be enough to stoke economic activity.[2]

On the domestic side, investors got a first look at Q3 economic growth and found that gross domestic product (GDP) grew a whopping 3.5% for the quarter.[3] Though GDP growth decelerated from its 4.6% pace in the second quarter, it was the fourth quarter out of the last five that the economy has grown more than 3.5%.[4] Keep in mind that this is only the first GDP growth estimate, and it will definitely see revisions as more reports come in.

The Federal Reserve's Open Market Committee met last week and announced the end of its quantitative easing programs, meaning that after October, the Fed will no longer purchase new bonds to prop up the economy.[5] Though the news was widely expected, analysts are reading a bit of a hawkish tone to the Fed's announcement. Because the Fed feels optimistic about the country's economic outlook, some analysts think that rate hikes might come as early as Spring 2015.[6] Either way, we're confident that the Fed will look closely at all the data available before making any big decisions.

Looking ahead, analysts will be watching the European Central Bank's meeting to see whether Europe will follow where Japan is leading. Although demand is also weakening in Europe, it's unlikely that the ECB will take on significant asset purchases. Investors will also be watching to see whether the October jobs report supports opinions that the labor market is improving rapidly.[7]

Overall, investors' fears that led to the selloff in mid-month turned out to be unfounded. Is there more room for upside after a turbulent month? If October has taught us anything, it's that markets can turn on a dime. Though investors are feeling better about the global economic picture, fresh worries could lead to further turbulence going forward. As always, we're continuously monitoring markets and making prudent changes where warranted.

ECONOMIC CALENDAR:

Monday: Motor Vehicle Sales, PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: International Trade, Factory Orders
Wednesday: ADP Employment Report, ISM Non-Mfg. Index, EIA Petroleum Status Report
Thursday: Jobless Claims, Productivity and Costs
Friday: Employment Situation

_{Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.}

HEADLINES:

Jobless claims rise, but remain close to 14-year lows. New claims for unemployment benefits rose slightly, but remained very close to the levels last seen in 2000. In context, these levels are 20% lower than they were last October, indicating that fewer workers are being laid off.[8]

Durable goods orders falter in September. Orders for long-lasting manufactured goods fell for the second month in a row, indicating that companies are reluctant to spend in the face of slowing global growth.[9]

U.S. wages gain most since 2008. A measure of labor costs showed that the wages paid to American workers gained significantly in the third quarter, a sign that a pickup in income growth is coming.[10]

Gas prices drop below $3/gallon. Nationwide, average gasoline prices have dropped below $3/gallon for the first time since December 2010, driven by a glut of oil on international markets. This is a boon to American consumers, who are spending much less on transportation.[11]