The Markets

In the wake of the midterm election results that gave Republicans control of both houses of Congress, domestic equities took a break from their recent volatility. Though the S&P 500’s increase was relatively modest, it still managed to regain the 2,000 level and go on to set three fresh record highs in the process. The Dow industrials not only set their own new record but also had the week’s biggest gain, while the Nasdaq and Russell 2000 ended the week basically flat. Declines in oil prices continued to make headlines as the price of West Texas Intermediate crude fell below $80 a barrel.

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

• The U.S. unemployment rate edged down 0.1% to 5.8% in October, according to the Bureau of Labor Statistics. The economy added 214,000 jobs, most of them in restaurants, retail, and health care. The new jobs figure was slightly lower than the 222,000 monthly average so far this year. Meanwhile, October’s 3-cent increase brought the average hourly wage to $24.57; that average is up just under 2% over the last 12 months.
• Saudi Arabia announced it would cut its price for oil sold to U.S. customers and raise prices for Asian customers. On top of increased Alaskan oil production during October, that caused the price of crude oil to drop to its lowest level in more than two years. The Organization of the Petroleum Exporting Countries said it expects demand for OPEC crude oil to fall nearly 2 million barrels a day to 28.2 million barrels a day by the end of 2017.
• Lower than expected growth in Germany, France, and Italy led the European Commission to cut its growth forecast for next year. The commission said it now sees the eurozone’s 2014 GDP increasing by 0.8% rather than the 1.2% forecast last spring, while the 28-member EU as a whole is now expected to grow 1.3%. The forecast for 2015 is 1.1% growth for the eurozone and 1.5% for the EU. Eurozone inflation is seen stalling at 0.5% this year and 0.8% next year–far below the European Central Bank’s target 2%. Nevertheless, the European Central Bank left its key interest rate unchanged, though ECB President Mario Draghi once again said fresh stimulus measures will be adopted if necessary.
• A sluggish global economy also affected the U.S. trade deficit, according to the Bureau of Economic Analysis. A 1.5% decline in exports to the rest of the world was a major reason for September’s nearly 7% increase in the trade gap.
• S. manufacturing activity declined 0.6% in September, according to the Commerce Department. However, the Institute for Supply Management’s manufacturing index suggested a course reversal in October; the index rose 2.4%, and the 59% reading represented the 65th straight month of expansion.
• S. construction spending was down 0.4% in September as private and public construction fell 0.1% and 1.3% respectively. The Commerce Department said it was the fourth straight monthly decline in private construction spending.

Eye on the Week Ahead

Data from the retail sector will dominate what little economic information is on tap next week. The Job Openings and Labor Turnover Survey report also may get extra attention for its implications for the employment picture.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The Markets

A robust U.S. GDP reading coupled with the prospect of greater economic stimulus in Japan and additional positive corporate earnings reports helped drive both the Dow industrials and the S&P 500 to new record highs. The small caps of the Russell 2000 saw their third straight week of solid gains, which gave the index a positive year-to-date return once again.

Gold tumbled nearly $60 an ounce, hurt in part by the promise of additional monetary stimulus by the Bank of Japan. And the benchmark 10-year Treasury retreated as investors regained an appetite for equities risk.

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

• The U.S. economy grew at an annualized rate of 3.5% during the third quarter, according to the initial estimate by the Bureau of Economic Analysis. That was slightly less than Q2’s 4.6%, but still much stronger than during 2014’s first quarter.
• As expected, the Federal Reserve’s monetary policy committee finally called a halt to new bond purchases, which have helped support the economy for the last six years by making credit easier to get. The statement said that despite improvements in the labor market and general economy, the committee sees inflation being held in check by lower energy prices. Therefore, it still anticipates the Fed funds interest rate will remain at its current level for “a considerable time.” However, that timetable could be accelerated by unanticipated upticks in inflation and/or employment (or pushed back if either declines).
• As Fed bond purchases came to an end, the Bank of Japan went in the opposite direction, unexpectedly announcing it will expand its securities purchases. The move is designed to try to reduce the potential for deflation (Japan’s 1% annual inflation rate is far below the central bank’s 2% target). The added buying could make Japanese exports cheaper and help the country’s economy recover from the effects of a sales tax increase in the spring.
• Durable goods orders fell 1.3% in September, according to the Commerce Department. However, much of that was due to a 3.7% decline in the typically volatile transportation sector; excluding transportation, new orders were down 0.2%.
• Home prices rose in August, but the annual growth rate was the slowest in almost two years. The 0.2% increase in the S&P/Case-Shiller 20-City Composite Index represented a 5.6% annual increase from the previous August, down from July’s 6.7%.
• Despite a 0.2% increase in personal income in the United States during September, personal consumption fell by an equal amount, according to the Bureau of Economic Analysis. The drop in personal consumption was the first monthly decline since January.

Eye on the Week Ahead

With quantitative easing officially at an end, what’s left of the Q3 corporate earnings season could receive more attention. And as the Fed watches the labor market closely to determine the timing of rate increases, investors will do the same with Friday’s jobs report. The results of Tuesday’s midterm elections also could influence the mood of the markets.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

The Markets

October lived up to its reputation for volatility as triple-digit intraday swings in the Dow became almost commonplace. Despite being spooked for much of the month–at one point the S&P 500 was down almost 8% from its most recent high–both the S&P and the Dow industrials rallied strongly to end the month at fresh all-time records. Generally encouraging corporate earnings from U.S. companies, a strong Q3 GDP, and increased central bank support overseas helped equities markets overcome fears about the end of the Federal Reserve’s quantitative easing and global concerns about slowing growth and the threat of Ebola.

Increased U.S. energy resources and reduced global demand meant that oil prices continued to drop, ending the month at roughly $80 a barrel. The dollar maintained its September gains against a basket of six foreign currencies; since oil is traded in dollars, a stronger dollar also helped keep oil prices in check. Meanwhile, after a bounce at mid-month, the price of gold plummeted to roughly $1,170 an ounce. Not surprisingly, the volatility in equities caused the yield on the benchmark 10-year Treasury to fall briefly to its lowest level since June 2013 as investors sought the relative safety of Treasury securities.

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

The Month in Review

• The U.S. economy grew at an annualized rate of 3.5% during the third quarter, according to the initial estimate by the Bureau of Economic Analysis. That was slightly less than Q2’s 4.6%, but still much stronger than during 2014’s first quarter.
• The 248,000 new jobs created in September helped cut the U.S. unemployment rate from 6.1% to 5.9%; it’s the first time since July 2008 that joblessness has been below 6%. Also, the Bureau of Labor Statistics said hiring during the prior two months was stronger than previously thought. However, at least some of the decline in the unemployment rate resulted from 97,000 people, such as retiring baby boomers, dropping out of the labor force. That brought the percentage of people in the workforce to 62.7%–the lowest participation rate since 1978.
• As expected, the Federal Reserve’s monetary policy committee halted new bond purchases, which have helped support the economy for the last six years by making credit easier to get. The statement said that despite improvements in the labor market and the overall economy, the committee sees inflation being held in check by lower energy prices. Therefore, it still anticipates the Fed funds interest rate will remain at its current level for “a considerable time.” However, that timetable could be accelerated by unanticipated upticks in inflation and/or employment (or pushed back if either declines).
• As Fed bond purchases came to an end, the Bank of Japan went in the opposite direction, announcing it will expand its securities purchases. The move is designed to prevent potential deflation (Japan’s 1% annual inflation rate is far below the central bank’s 2% target). The added buying could help make Japanese exports cheaper.
• Eurozone manufacturing output saw its largest monthly decline since late 2008 in August, according to the European Union’s statistical agency. The 4.3% decline in German industrial production was especially unsettling, and September’s 0.3% annual inflation rate in the eurozone–the lowest level in five years–raised concerns about the possibility of deflation. To help combat that weakness, the European Central Bank will expand its bond purchases to include asset-backed securities and certain bank bonds, but declined to lower its key interest rate, at least for the time being.
• China’s growth rate, while still robust compared to the rest of the world, slowed to 7.3% during the third quarter, according to the National Bureau of Statistics–below the 7.5% official target for annual growth. Real estate prices and sales continued to be a soft spot. To try to jump-start lending, China’s central bank plans to inject roughly $33 billion into its banking system.
• Data on the U.S. housing market was generally encouraging. September’s 2.4% increase in existing-home sales represented the fastest growth of 2014, according to the National Association of Realtors®. New home sales also were up 0.2%, which put them 17% higher than in September 2013, and the Commerce Department said both housing starts and building permits were up for the month. However, home prices were a different story. The 0.2% increase in the S&P/Case-Shiller 20-City Composite Index in August represented the slowest annual growth rate in almost two years.
• U.S. inflation continued to be well-contained. Consumer prices rose 0.1% in September, which left the Consumer Price Index up 1.7% for the last 12 months. The Bureau of Labor Statistics said increases in food and housing outweighed a 0.7% drop in energy costs. Meanwhile, wholesale prices fell 0.1% in September, largely because of declines in both food and energy costs, though wholesale prices overall are 1.6% higher than in September 2013.
• Retail sales in the United States slipped 0.3% in September, though the Commerce Department said they were 4.3% ahead of a year earlier. The biggest declines were seen in building and garden supplies, clothing, and nonstore retailers, all of which were down more than 1% during the month.
• U.S. durable goods orders fell 1.3% in September, according to the Commerce Department. However, much of that was due to a 3.7% decline in the typically volatile transportation sector; excluding transportation, new orders were down 0.2%.

Eye on the Month Ahead

With the Fed’s quantitative easing officially at an end and monetary policy meetings on hold until December, equities markets may begin to focus on what’s left of earnings season as well as the jobs and inflation data that will affect future Fed actions. The results of Tuesday’s midterm elections also could influence the mood of the markets.

The Markets

Relief at last: Investors finally regained some appetite for risk as equities got a break from the recent wave of selling. After four straight weeks of losses, the S&P 500 saw a strong bounce. However, the Nasdaq’s rebound was even bigger and the small caps of the Russell 2000 saw their second consecutive week of robust gains. Though the Dow industrials lagged the other three domestic indices, the rally brought the Dow back into positive territory for the year. The Global Dow also recovered from its slump, nearly managing to break even for the year.

The strong showing in equities helped send the benchmark 10-year Treasury yield up as prices fell. Meanwhile, the price of oil stabilized in the low $80s

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

• Sales of existing homes jumped 2.4% during September, according to the National Association of Realtors®. That’s the highest pace of 2014, though the number of sales was 1.7% lower than in the previous September. The $209,700 median sale price was 5.6% higher than a year earlier.
• Meanwhile, new home sales were up 0.2% in September; the Commerce Department said that put them 17% higher than in September 2013.
• Consumer prices rose 0.1% in September. The Bureau of Labor Statistics said that left the Consumer Price Index up 1.7% for the last 12 months–a level that might give the Federal Reserve some leeway to keep interest rates low. Increases in food and housing outweighed a 0.7% drop in energy costs.
• China’s growth rate, while still robust compared to the rest of the world, slowed during the third quarter, according to the National Bureau of Statistics. The 7.3% increase in the country’s gross domestic product was slightly lower than Q2’s 7.5% and below the official target for annual growth (also 7.5%). Real estate prices and sales continued to be a soft spot in the Chinese economy.
• After subjecting 150 European banks to annual stress tests, the European Central Bank and the European Banking Authority said only 12 of them needed to raise additional capital as protection against a worst-case scenario. Italy had the most problem banks, with Greece and Cyprus tied for second.
• Similar stress tests for U.S. banks to be conducted by the Federal Reserve next year will measure how well they would withstand a sharp deterioration in the corporate bond market, especially high-yield bonds issued by highly indebted companies. As in previous years, the tests also will gauge exposure to threats from a variety of factors that include sharp declines in the job market and economic growth, a jump in oil prices to $110 a barrel, and a 60% drop in the stock market. Banks that fail the test could be restricted in their ability to pay dividends or buy back stocks until they address the deficiencies.

Eye on the Week Ahead

Once again, all eyes will be on the Fed as quantitative easing is expected to come to an end. And with recent volatility in the equities markets suggesting investor uncertainty, the first estimate of Q3 gross domestic product is likely to be significant. Also, the release of stress tests conducted on European banks could affect investor perception of the financial system there.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.