US Economic Growth, Jobs Spur Optimism For Stocks – October Recap

by Greg Naylor     October was an eventful month on the economic front, as the government shut down for a time, and then re-opened.  Surprise US economic growth and solid jobs data spurred a strong October for stocks. Now all eyes are on the upcoming debt ceiling fight (again), as well as the confirmation process for President Obama’s choice of the dovish Janet Yellen as the next Federal Reserve Chairperson.

Here is what happened in the capital markets, by the numbers:

Stocks & Bonds

The growth of September continued and gained strength in October.  Bonds continue to recoup some of their losses earlier in the year.

Commodities & Currencies

NYMEX crude lost 5.42% in October, down to $96.38 per barrel. Gold was nearly unchanged, closing a sliver lower at $1,323.70 per ounce.  The dollar index was essentially unchanged in October, and is also basically unchanged year-to-date.

Economy

The Department of Commerce released surprisingly good GDP data, highlighting stronger than expected US economic growth.  This first estimate shows that the U.S. economy grew at a 2.8% rate in the 3^rd quarter, topping the consensus US economic growth estimate of 2.5%.  Behind the headline was both encouraging and discouraging news.  The economy grew despite shrinking federal expenditures, and consumer spending growth is also slowing down.  Much of the growth in GDP came from businesses restocking inventories, which could prove to be a transitory positive unless consumer spending also picks up.

The Department of Labor finally released unemployment data, after a delay due to the government shutdown of October.  Although the unemployment rate ticked up to 7.3%, from 7.2%, jobs creation surprised on the upside – although still muddy, this was supportive of US economic growth.  Analysts expected the economy to add around 100,000 jobs in October, but the report estimates that 204,000 jobs were added.  Labor force participation continued to fall, dropping another 0.4 percentage points to 62.8%.  As previously discussed, one reason that the unemployment rate has continued to fall is not through robust job creation, but rather through record numbers of Americans leaving the work force (presumably for early retirement, disability, school etc.).

The Institute for Supply Management had surprisingly good news, reporting that October’s manufacturing PMI rose to 56.4, from the previous month’s 56.2, indicating continued expansion in the manufacturing sector.

The National Association of Realtors (NAR) reported that the annual rate of existing-home sales in September increased by 10.7% from September 2012, although this represents a slower rate of growth when measured month-by-month. National median prices rose from the prior year by 11.7% to $199,100.  Foreclosures and short-sales, as a percentage of overall sales, were at 14%, a slight up-tick from the 12% of August.

Summary

Bloomberg carried an interesting article a few weeks ago.

“When HSBC Holdings Plc’s economists from around the world recently pooled their forecasts, virtually all had a similar source of growth in mind for the region they monitored: exports.

The impossibility of every nation being able to sell more than it buys means some of the analysts must be wrong — unless the rest of the solar system becomes a source of demand for the globe’s products, Stephen King, HSBC’s chief economist, told an Oct. 16 conference in London, flashing a slide of the planets.”

This is a perfect example of why economics is referred to as ‘the dismal science.’  The ability of even the best economists to provide accurate forecasts is quite poor.  Clearly, some countries will not see exports live up to expectations, meaning growth will be less than expected and hoped for.  There are no big lessons here, other than to confirm that the global recovery remains uncomfortably close to the global recession. 

This material was prepared by Greg Naylor, and does not necessarily represent the views of Woodbury Financial or its affiliates.  This information should not be construed as investment, tax or legal advice and may not be relied upon for the purpose of avoiding any Federal tax liability.  This is not a solicitation or recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such.  The S&P500, MSCI EAFE and Barclays Aggregate Bond Index are indexes.  It is not possible to invest directly in an index. 

Investing involves risks and investors may incur a profit or a loss.  Past performance is not an indication of future results.  There is no guarantee that a diversified portfolio will outperform a non-diversified portfolio in any given market environment. No investment strategy can guarantee a profit or protect against loss in periods of declining values. 

Data Sources:

• www.standardandpoors.com – S&P 500 information
• www.msci.com – MSCI EAFE information
• www.barcap.com – Barclays Aggregate Bond information
• www.bloomberg.com – U.S. Dollar & commodities performance
• www.realtor.org – Housing market data
• www.bea.gov – GDP numbers
• www.bls.gov – CPI and unemployment numbers
• www.commerce.gov – Consumer spending data
• www.napm.org – PMI numbers
• www.bigcharts.com – NYMEX crude prices, gold and other commodities
• https://data.bls.gov/timeseries/LNS11300000 – Labor participation data
• https://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm – PCE reference numbers
• https://www.bloomberg.com/news/2013-10-25/export-slowdown-threatens-world-economy.html – HSBC article on exports

About Greg Naylor: Greg is a partner and co-founder of Fiat Wealth Management, an independent financial advisory firm in Long Lake, Minnesota. He has been investing for over 7 years and enjoys sports, reading, singing, and spending time with family. Greg is a 2004 graduate of the University of Minnesota and lives in South Minneapolis with his wife Kat.

Any opinions expressed herein are solely those of the author and do not in any way represent the views or opinions of any other person or entity.