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Stocks Post Best Gains of 2014

Market Digest – Week Ending 10/24

US stocks posted their best week of the year, driven by solid earnings and expectations of more significant asset purchases by the European Central Bank. An Ebola case reported Thursday night in New York was largely overlooked as investors gained confident the virus can be contained. Apple and Microsoft each exceeded earnings expectations on robust iPhone 6 and cloud services, respectively. Amazon, McDonalds, Coca-Cola, AT&T and IBM were among major companies that disappointed.

Weekly Returns:

S&P 500: 1,965 (+4.1%)
FTSE All-World ex-US: (+2.3%)
US 10 Year Treasury Yield: 2.27% (+0.07%)
Gold: $1,238 (+1.2%)
USD/EUR: $1.267 (-0.7%)

Major Events:                 

  • Monday – Apple reported a 13% increase in earnings and predicted a record holiday season.
  • Monday – The US dropped supplies and weapons to Syrian Kurds fighting Islamic State extremists in Kobani.
  • Tuesday – The ECB said it is considering purchases of corporate bonds as one option to stimulate the economy. Stocks rallied on the news.
  • Tuesday – The US said it will restrict flights from West African nations struggling with the Ebola virus to five arrival airports.
  • Wednesday – A man who converted to become a Islamic extremist shot and killed a soldier at Canada’s War Memorial before being killed in the Parliament building.
  • Friday – Proctor & Gamble announced it would spin-off its Duracell battery unit.

Our take:

Earnings have been generally good. With about 40% of the S&P 500 reporting earnings so far, 75% have beat earnings expectations and 60% topped sales estimates. Estimates tend to be conservative, so these numbers represent solid, but not spectacular results. At the end of the day, earnings are growing, and that means stock prices can also increase.

Markets love to prove people wrong. While this week’s rally surprised many, we saw very little panic selling during the declines in the first half of October. Complacency remains, but greed is absent. In our view, all of this combines for a relatively neutral short term outlook for stocks.


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