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S&P, DOW Surge To Record Highs

Market Digest – Week Ending 10/31

Global stocks had another strong week, punctuated by a Friday rally ignited by an announced increase in stimulus spending from the Japanese government. The S&P 500 has recovered all of its losses from the late September and early October “mini-correction”. International stocks remain lower as the dollar continues to strengthen, driven by a solid Q3 GDP report and the surprise announcements in Japan. Currency moves also contributed to further declines in oil and gold prices. Credit card giants Visa and MasterCard posted strong earnings growth while Facebook and Twitter disappointed.

Weekly Returns:
S&P 500: 2,018 (+2.7%)
FTSE All-World ex-US: (+2.7%)
US 10 Year Treasury Yield: 2.33% (+0.06%)
Gold: $1,171 (-5.4%)
USD/EUR: $1.254 (-1.0%)

Major Events:                 

  • Monday – Brazil’s stocks and currency fell after President Dilma Rousseff was re-elected. Her opponent was considered to be more business friendly.
  • Monday – The CDC issued guidelines recommending those possibly exposed to Ebola voluntarily isolate themselves, as opposed to forced quarantine.
  • Tuesday – Facebook announced a 59% increase in revenues, but rapidly rising costs disappointed investors. Shares fell.
  • Wednesday – The Fed ended its historic bond buying program and again indicated it would keep interest rates near zero for a “considerable time”.
  • Wednesday – The San Francisco Giants won the World Series for the third time in five years.
  • Thursday – Preliminary US Q3 GDP was reported at 3.5%, providing evidence the economy maintains momentum.
  • Thursday – MasterCard and Visa reported strong earnings growth as consumers shun cash.
  • Friday – The Bank of Japan announced it would increase asset purchases by 33%, including stock and real estate funds and the national pension fund said it would increase allocation to stocks.
  • Friday – A Virgin Galactic rocket ship which was supposed to start commercial space tourism in the next few months exploded, killing one pilot.

Our take:

The price of Brent Crude oil plummeted from $107 in August to $86 today. This has obviously hurt Energy stocks, but it bodes well for the overall economy. The price of gas in the US dropped below $3 for the first time in four years. That will have a direct increase in holiday spending.

Short term correlations between stocks and oil have been significantly positive, but longer term trends show little relationship. Ten of the last eleven recessions followed a spike in oil prices, but that may not tell us much because it is natural that when demand is growing the price would go up and when demand falls the price will fall. Lower energy prices will also constrain inflation, which could lead the Fed to keep interest rates lower for longer.

Oil has been hit by increased production in the US and Libya and soft demand in Europe and Asia. So far, Saudi Arabia has been content to lower prices and not decrease supply. If oil prices start to drop below $75, we will probably see some reduction in supply, which could create a floor for prices.

Lower oil prices are bad for the Energy sector, bad for Russia (which could be problematic) and bad for producers of alternative energy sources. But they could help keep the consumer segment of the US economy growing. This week’s GDP release shows the US is not slowing down, and it may not for quite a while.

Congratulations to the San Francisco Giants on another World Series win. It is inspiring to see an entire organization work together to achieve amazing results. Happy Halloween.

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